Sterling rallied slightly from Tuesday’s heavy losses, after the minutes from the Bank of England’s latest policy meeting showed that more than one member voted to increase interest rates. The newest member, Martin Weade joined Andrew Sentence in voting to increase the interest rate by 0.25%. The Pound reacted to this news by increasing by 0.4% against the Euro and a similar amount to the US Dollar. Adam Posen remained alone in voting to increase quantitative easing to stimulate the economy.
The general tone of the minutes was more hawkish than previous, as members showed concern about inflation being entrenched in the UK economy. Mervyn King underlined this by saying in a speech yesterday that consumer price rises may reach the 5% barrier by the end of the year. However with yesterday’s lapse into negative growth reported for the fourth quarter of 2010, the consensus is that the wait and see approach favoured by the other committee members may be the best option.
Outside of the UK the Dow Jones Index today reached 12,000 for the first time since June 2008. Investors are becoming increasingly bullish about corporate America’s ability to rebound from the financial crisis and ensuing recession. Had Sterling not been hit so hard yesterday the Pound would probably be trading over 1.6 to the Dollar today, as investors unwound risk averse positions and purchased more volatile currencies.
Currency dealers are looking forward to the Federal Open Market Committee (FOMC) interest rate decision at 1915 GMT this evening. We will see how US policy makers are interpreting current economic data. Changes to near term economic policy are not expected, but the inflation outlook is of interest.
At 2000 GMT The Reserve Bank of New Zealand will announce their interest rate, which is expected to stay at 3%. The fundamental feeling is that the economic recovery is not self sustaining quite yet and there are few signs of inflation.
