Political unrest in the Middle East finally led to a change in market sentiment on Friday, as the US Dollar rallied against many of its counterparts. President Hosni Mubarak finally yielded in Egypt’s revolution and handed power to the military. The markets reacted to this development in conflicting ways. US equities rallied immediately and the price of oil rose, suggesting Mubarak’s resignation was well received. The price of the US Dollar rose however, which suggest that risk sentiment was reduced due to fears of contagion and instability. Normally when risk sentiment reduces stock markets and commodity prices drop while the US Dollar rises. This time all three have increased, suggesting that one or more of these rallies will be short lived.
Back in the UK the Bank of England Monetary Policy Committee left interest rates unchanged at 0.5% on Thursday, despite some pressure to increase them. Evidence of an economic recovery and sustained inflation has led many to believe that the base rate will increase at some point this year. Further evidence of an economic recovery arrived on Friday as the Producer Price Index – a monthly gauge of prices charged by UK manufacturers – came in comfortably above expectations. This shows that manufacturers are able to charge higher prices as demand increases, which suggests economic conditions are improving. Should data like this continue to be released, expect Sterling to steadily rise.
On the continent suspicion that Portugal will have to tap into the European Financial Stability Facility increased on Friday as yields on Portuguese debt climbed. This has caused the Euro to drop against many currencies including the Pound and the US Dollar. The Euro has been on a downward slide for a few weeks now. The Canadian Dollar increased on Friday after an unexpected trade surplus was released.
The week ahead will be notable in the UK as important inflation data is released. January’s Consumer Price Index is released on Tuesday and the Bank of England’s Quarterly Inflation Report arrives on Wednesday. If these show that inflation remains comfortably over the 3% mark expect the Pound to rally. Over the Atlantic consumer prices are also released for the US on Thursday and Canada on Friday. Over the channel the European gross domestic product estimate is released on Tuesday and is expected to show strong growth in Germany with weak growth elsewhere. In the East, China’s trade balance will give a clue toward Chinese monetary policy, which will impact on the commodity currencies of Australia, New Zealand & South Africa.
