The pound had a terrific day for a change in the markets as traders reacted to the implication contained in the Bank of England’s (BoE) quarterly inflation report that interest rates in the UK may after all have to rise later on this year. The consensus date for a 0.25% in UK rates has been bought forward from February 2012 to December 2011.
The pound gained against all 16 of the most actively traded currencies in the fx market including a 1% gain against the Euro to send it to a 5 week high less than a week after it registered a 14 month low against the same currency.
In its latest inflation report, the BoE seems to indicate that medium term GDP and inflation risks are more or less evenly balanced. Its near term growth forecasts are now a bit weaker, however, while its very short-term prognosis for inflation is “markedly higher than in February”.
As regards the Bank´s economic growth projections, the BoE now expects that, “the continuing squeeze on households’ real incomes is likely to weigh on demand, especially over the next year or so.” However, it then indicates that, “the chances of four-quarter GDP growth being either above or below its historical average rate are judged to be roughly balanced”.
Meanwhile, the euro continues to suffer from the sovereign debt crisis losing ground across the board on growing concerns about Greece’s debt problems.
The euro was pressured after reports of another general strike in Greece as public sector workers protest against the country’s austerity measures. The protests became increasingly violent throughout the day, sparking concern about stability in Greece. Unconfirmed reports suggested that Greece may need another bailout of up to €100 billion unsettled the markets.
The US dollar also received a boost from another commodities sell-off that increased risk aversion lifting the dollar to a 3 week high against other major currencies. The dollar index, which measures the US currency against a basket of six others, rose to 75.419.
Commentary by Tony Redondo
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