The pound has started the week well with some solid buying during Asian trade. While we were sleeping the Asian currency markets have been encouraged by recent economic releases from the UK they have bought the pound back up towards a 2 month high against the dollar, traders still favor the Euro over the pound and that cross is remaining static so far this morning.
Monetary Policy Committee member Andrew Sentance said over the weekend that The Bank of England must not let markets lose faith in its commitment to keeping prices under control by allowing inflation to stay high,.
In an article for the Times newspaper, Sentance also said that embarking on a gradual tightening of policy now would help to reduce the shock of an abrupt rise in interest rates further down the line.
“Since the 1990s we have had a framework for setting interest rates, which has built confidence that low and stable inflation will be maintained,” Sentance wrote.
“This confidence must not be eroded by a perception that the MPC is becoming more tolerant of higher inflation.”
Consumer price inflation has been above the central bank’s 2 percent target since last December and Sentence has been consistently voting for a rise in rates for the last 4 months, he has yet to convince any of the other members of the panel to follow him.
The ideal scenario for the pound would be a tightening of policy in the form of higher interest rates and no further quantitative easing with slightly higher GDP and stable house prices. At the moment it looks less than likely that any of these factors will be met.
The euro took a breather on Monday after hitting five-month highs against the dollar late last week but losses were limited as the greenback remained under pressure on expectations of more U.S. monetary easing.
The dollar has steadied overnight against the yen above 84 yen as selling by Japanese exporters, corporate traders and institutional investors ahead of the fiscal half-year end was offset by wariness of more intervention by Japan.
Traders said the euro was facing some profit-taking against the dollar after gaining 6 percent on the dollar this month and hitting its highest since April on Friday at 1.3500 EUR/USD but traders saw potential for further gains. The Fed signaled that they are again considering a further injection of cash into the system.
“The euro is not being bought on its own merits, and the market will continue to sell dollars into their November meeting on expectations of more easing,” said Lee Hardman at Bank of Tokyo-Mitsubishi UFJ. “That will also continue to support equities and commodity prices.”
Looking forward to this week, today there are no high impact data releases. Currency transfers are likely to remain subdued. The corporate transfer market in the UK doesn’t have the same immediacy as the Japanese market and is likely to also stay slow. Tuesday will see the release of high impact inflation data from Germany followed very closely by the UK GDP figure. Markets could see a lot of volatility after this release due to the sensitivity of the recovery here.
