The pound rallied to a thirteen month high against the US dollar after a string of encouraging UK economic data out yesterday.
House prices edged higher, mortgage approvals rose more than expected in January and the UK manufacturing sector maintained its strong start to the year. The rally was backed by speculation that UK interest rates will rise before those in the US.
In testimony to the Treasury Select Committee, Bank of England (BoE) governor Mervyn King warned the banks that they will face more rigorous oversight when the BoE takes over their supervision following the demise of the Financial Standards Authority (FSA), scheduled for 2012.
King said that the new Prudential Regulatory Authority will “have more senior people interacting regularly with the big institutions and challenging them.” It will focus on the “big questions” rather than getting bogged down in detail, he said.
Turning to the economic climate in the UK, King said he did not believe that there has been a significant increase in medium term inflation expectations and that lifting interest rates would be “self-defeating.”
The dollar managed to regain some recent losses against the euro on the back of cautiously optimistic economic outlook from Federal Reserve Chairman Ben Bernanke and stronger than expected US manufacturing data.
The Institute for Supply Management’s factory index rose to its highest level since May 2004. The US dollar also found support as oil prices rose to a 2 ½ year high as events in the Mideast continue to spook investors.
Meanwhile, the New Zealand dollar fell heavily on speculation that the New Zealand Reserve Bank (RBNZ) will cut interest rates to help the economy recover from the deadly Christchurch earthquake.
Prime Minister John Key was quoted by the Bloomberg news agency as saying that he expects, and would welcome, an interest rate cut. Estimates put the cost of rebuilding the Christchurch area at over NZ$20 billion.
The RBNZ has kept interest rates unchanged at 3% since July 2010. Its next meeting is just over a week away on 10 March.
Commentary by Tony Redondo
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