The pound fell heavily against the euro yesterday after a flurry of calls from the likes of the Institute of Directors (IoD), Confederation of British Industry (CBI) and various trade unions warning against an early rise in UK interest rates to combat the inflationary pressures building in the UK economy in case such a rise derails the ‘fragile’ economic recovery.
The Royal Institution of Chartered Surveyors (RICS) reported that the UK housing market remained sluggish last month as cautious buyers met with limited levels of supply. Some 7% more surveyors reported a fall in demand, rather than a rise, indicating that potential buyers were wary of the economic outlook and the possibility of mortgage rate increases later in the year.
The CBI also warned that UK unemployment will not fall for two years as the economy gathers momentum more slowly than official forecasts.
The UK government’s decision to add an extra £800 million tax on UK banks also weighed on sentiment on the pound.
The euro rallied broadly and was up over 0.84% against the pound and 0.4% against the US dollar as traders took profits from the recent gains made by the US dollar ahead of Federal Reserve Chairman Bernanke’s testimony on Capitol Hill.
The Chinese authorities increased interest rates for the third time since October with a 0.25% increase. The increase had already been factored in and there was some relief that it was only 0.25% and not a bigger increase.
Last week’s slightly weaker Chinese PMI data probably had some part to play in that as Chinese authorities sought to massage the inflation rate lower gradually. Analysts are already predicting a further rise of 0.25% in the near future.
The Australian dollar, always sensitive to Chinese data, finished the day pretty much unchanged after initially spiking lower on the news.
Commentary by Tony Redondo
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