The pound fell heavily across the board yesterday giving up all of the gains made earlier this week after the publication of UK unemployment data and the Bank of England’s (BoE) inflation report.
BoE governor Mervyn King advised that UK inflation is likely to be ahead of previous estimates in 2011 but should start to fall back in 2012. He also suggested that the Bank had become more open to the possibility of raising interest rates but said that a decision has not been made on whether to increase rates.
“Some people are running ahead of themselves,” King said in response to comments that the latest report has increased the chances of an early rise in UK interest rates.
High commodity and import prices, with oil and gas up over 15% over the past three months and food prices up more than 20% over the same period combined with the 2.5% VAT rise early in January to push up inflation.
The Office for National Statistics (ONS) reported that the number of people claiming unemployment benefit rose in January for the first time in four months as youth unemployment hit another record high. Figures showed 2,400 people started claiming the dole last month lifting the total to 1.46 million. Economists had expected a fall of around 3,000. An extra 44,000 people were registered as out of work in the three months to December pushing the total up to 2.49 million. The jobless rate remains at 7.9%.
The euro gained over 1% against the pound on the news despite Portugal admitting it faces a second recession in three years following the introduction of austerity measures including tax increases and harsh spending cuts. Economists still rank Portugal as among those most likely to need an EU/IMF bailout sometime this year and comments from central bank governor Carlos Costa today will have done nothing to change their opinion.
“We can say that we are in recession,” Costa told business daily Diario Economico.
The dollar was steady as fears about tensions in the Middle East escalated after Israel’s foreign minister warned that two Iranian warships were planning to make their way to Syria via the Suez canal. With tension also rising in Bahrain, Libya and Algeria after recent events in Tunisia and Egypt, the dollar, Japanese Yen and Swiss France are benefiting from ‘safe haven’ flows from investors.
The dollar also benefited from the news that the Federal Reserve raised its growth expectations for the US economy for 2011. Minutes of the latest policy meeting showed officials now expects US GDP will rise between 3.4% to 3.9% in 2011, up from its November estimate of an increase of 3.0% to 3.6%.
Commentary by Tony Redondo
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