The pound fell yesterday to a 2011 low on a trade weighted index basis on the back of the battle of interest rate expectations.
European Central Bank (ECB) President Jean Claude Trichet has the markets convinced that euro zone interest rates will be raised in April from their current 1% level.
The pressure on the pound has intensified after two regional Federal Reserve Chairmen in the US both suggested in interviews over the weekend that the Fed should halt their quantitative easing (QE) program and consider raising US interest rates from their current record near zero low to 2.5%, “starting in the not-too-distant future.”
The US dollar duly strengthened in Monday trading sending the pound down to its lowest level against the dollar since the end of January.
Faced with a similar rhetoric from both the ECB and Fed, the pound and Bank of England (BoE) find themselves squeezed between two bigger central banks that have both shifted their rhetoric back to more normal, post crisis policy making.
| Yesterday, BoE Monetary Policy Committee (MPC) member Adam Posen, the arch ‘dove’ on the committee who remains sufficiently worried about the prospect of a ‘double dip’ recession in the UK to advocate not only that UK interest rates should remain at their record 0.5% low but also voted for an increase of £50 billion to the £200 billion Quantitative Easing program added fuel to the policy making fire by claiming that inflation is likely to fall to 1.5%, well within the government’s 2% target by 2012. Posen’s argument is that underlying weakness in the UK economy and the effects of the recently introduced austerity measures to tackle the deficit will hurt consumer spending and reduce the inflationary pressures that have now seen inflation rates exceed target for the last 10 months in a row. |
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.”
