The pound continues to gain ground touching two month highs against the US dollar after construction Purchasing Managing Index (PMI) data for January came in well above expectations following on from Tuesday’s record manufacturing PMI.
Today sees the release of services PMI data. The services sector makes up the bulk of the UK economy and if today’s data is equally positive, that could well add further evidence to the argument that last week’s Q4 GDP numbers could well be revised upwards in the weeks to come.
Andrew Sentence, a member of the Bank of England’s Monetary Policy Committee (MPC) commented yesterday about the need for a rise in UK interest rates to combat the rising inflationary pressures. Bank of England Deputy Governor Charlie Bean also stated that rates may have to rise in response to rising inflation have all helped to underpin support for the pound.
In a paper ahead of the government’s budget in March, the Institute for Fiscal Studies (IFS), a respected think-tank says that UK government borrowing in 2010-11 should be slightly less than the £2.9 billion predicted by the Office for Budget Responsibility (OBR), which was set up by the coalition government to oversee its attempts to deal with the deficit. The IFS added that “It is important that Chancellor George Osborne resist the temptation to engage in any significant net giveaway in the Budget.” Any fiscal loosening could be ineffective if it prompts the Bank of England to engage in an offsetting monetary tightening, the IFS said, adding that it would also risk undermining investor confidence.
Today see’s the European Central Bank (ECB) press conference by Trichet. This may also shed further light on the ECB’s thinking with respect to interest rate policy given his rather hawkish comments about inflation at the last meeting. He needs to be careful about overplaying his hand with respect to rate policy as the peripheral European countries can ill-afford a higher euro, let alone higher rates. The ECB is expected to keep rates unchanged at 1%.
Yesterday’s better than expected US ADP employment data managed to support the dollar to some extent, but it was also escalating clashes between pro and anti-Mubarak protestors in Cairo that caused an increase in the appeal of the safe haven status of the US dollar which helped the dollar pull back some lost ground.
Commentary by Tony Redondo
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