The Pound declined against the Euro while making gains against the Dollar as minutes from the BoE’s February meeting showed that the pro-rate hike camp found a new supporter. Policymaker Spencer Dale joined both Andrew Sentance and Martin Weale in voting to tighten policy. Calls to raise rates for the first time since July of 2007 have intensified as inflation remains above the BoE’s two-percent target. Records showed that Dale and Weale both voted for a 25 basis-point hike, while Sentance called for a more aggressive 0.50% hike. The minutes also showed that of the five members that voted for no increase in the benchmark rate “some thought that the case for an increase had nevertheless grown in strength.” However, sterling has encountered resistance as it nears its 2010 highs, and BoE Governor, Mervyn King, insists that the market’s expectations for higher rates are overdone.
The Dollar declined against the Euro and the Pound yesterday as the selloff in global equities slowed despite continued unrest throughout Northern Africa and the Middle East, investors appear to be focusing on skyrocketing crude oil prices.
Although Libya, the current hotspot for violent protests, is a major oil exporter and OPEC member, any potential slack in supply would be easily made up for by other oil producers. Investors appear to be more intently focused on the tiny Persian Gulf nation of Bahrain, where recent protests turned deadly. The island nation is home to a number of international businesses’ Middle East operations, but more importantly, borders Saudi Arabia’s oil-rich Eastern region. If the recent turmoil were to spill over into to the world’s largest oil exporter, the 9% jump in crude oil due to the Libyan unrest would likely only be a precursor to an even higher spike in commodity prices. The inevitably higher prices paid at the pump could stunt the fragile economic recovery in the US and Western Europe.
The Euro made gains against the Pound and the Dollar as investors price in higher interest rates in the Eurozone. ECB member, Yves Mersch, told reporters earlier in the week that the ECB “might adjust its monetary policy to address the inflation and debt problem,” suggesting that higher rates may be soon to come. However, the common currency’s upside remains limited by continued disparity amongst Eurozone members. While Germany and France’s economies show signs of steady growth, the region’s periphery economies continue to struggle. Protests in Greece over the retirement age and wages turned violent this yesterday and data out of Portugal, Ireland and Spain continue to underwhelm. However, broad dollar weakness from higher commodity prices and growing expectations of higher rates in the Eurozone will provide significant support for the EUR in the near term.
Data released 18.02.2011
EU 10.00 Business Climate (February)
EU 10.00 Economic Sentiment (February)
Industrial Sentiment
Services Sentiment
Consumer Sentiment
UK 11.00 CBI Distributive Trades (February)
US 13.30 Durable Goods (January)
US 13.30 Initial Jobless Claims (w/e 19th February)
US 15.00 New Home Sales (January)