The pound had a terrific day yesterday across the board, making good gains against all 16 of the most actively traded currencies.
The catalyst was UK government data showing the consumer price index (CPI), accelerated to 4% in January, double the Bank of England’s (BoE) target measure of 2% and 3.7% in December.
BoE governor Mervyn King and his colleagues on the nine-member Monetary Policy Committee (MPC) now face a dilemma as to whether to lift interest rates from a record low of 0.5%.
At the last meeting of the MPC, two members Andrew Sentance and Martin Weale voted to increase borrowing costs by 0.25% citing continuing inflationary risks.
The increase in VAT to 20% from 17.5% early in January played a part in pushing up inflation, as did higher commodity prices. Oil prices have been soaring in recent weeks, moving above $100 a barrel by some measures.
The pound was also helped against the euro by slower growth in the euro zone’s two biggest economies, Germany and France. The German economy grew by 0.4%,slightly short of economists’ forecasts of a 0.5% expansion, while France’s growth of 0.3% was just half of the rise that had been expected.
The continuing turmoil in the Middle East has encouraged investors to move funds into the safe haven that is the US dollar on Tuesday. The dollar hit a two month high against the yen and reversed losses against the euro.
Weaker than expected US retail sales also supported the dollar’s safe haven status. Sales were up 0.3% in January, according to the Commerce Department, down from a 0.5% gain the month before.
Commentary by Tony Redondo
“Any opinions expressed in this document are those of TorFX analysts. Any analysis and/or forecasts provided are aimed at helping clients understand market conditions and developing trends. Clients are wholly responsible for their own trading decisions.”
