The week began with significant gains for sterling against the euro on the back of last weeks push beyond the key 1.13 level.
Tuesday saw the release of the previous month’s consumer and retail price indexes. The data, which exceeded forecasts by 0.3% on both surveys, indicates prices increased for December. This in itself was not unexpected, but it does put pressure on the Bank of England to address the specter of inflation rising whilst interest rates remain at a record low.
The Bank of England Monetary Policy Committee Minutes showed a 9-0 vote in favour of an unchanged monetary policy in respect of both bank rate and quantitative easing. The tone of the MPC Minutes was fractionally more positive than in the previous month. Reference was made to the upturn in the global economy, largely Asian driven, although there was evidence of stronger US growth in the fourth quarter. Yesterday also saw publication of the Bank of England monthly Agents survey which places more emphasis on anecdotal evidence, including feedback from business executives. The Agents Summary of Business Conditions made reference to a very gradual improvement in business sentiment, in part due to a recovery in export demand. If this scenario is sustained, this would be positive for sterling.
Heightened Activity:
January is traditionally a period of heightened activity in the insurance, re-insurance and fixed income sectors. Internationally this activity incentivizes traders holding strong currencies to capitalize on the arbitrage potential in other markets and traditionally London benefits as the largest trader in bonds and exchange traded derivatives.
Analysts assert that any reduction in the unemployment rate in 2010 is likely to be very gradual, but in December Jobless Claims (Unemployment Change), although generally viewed as a lagging indicator, returned far better figures than expected with claims down by 15,200; also the Unemployment Rate, a figure that relates to November, dropped back to 7.8%. The number of unemployed people is an important signal of overall economic health because consumer spending is highly correlated with labor conditions, which puts a lot of focus on the retails sales figures over the Christmas period, and serves to reiterate the significance of the Bank of England’s role as the manager of inflation. This week has ended with the release of December’s retail figures. Fortunately they were better than the month previously, however not as good as forecast which prompted a slight drop off in sterling to a low of 1.1442 for the morning’s trading.
Despite these numbers, no rate hike is in the horizon. Mervyn King made a public appearance on Wednesday and cooled down such expectations. He said inflation could go above 3% but the likelihood is that it will cool later in the year, and preferred to focus on the problems of the economy, especially on the big government deficit.
A Mixed Bag:
Wednesday and Thursday of next week promise to deliver a mixed bag by way of information. There will be minor economic statements coming through from the Eurozone, mostly focusing on French and German spending and consumer and business sentiment, but these are unlikely to prompt any decisive change between sterling to euro. The 26th will see the release of the first HPI figures of the year, relative to December’s homes sales activity. Consumer sentiment in the UK has taken a bit of a knock already this year and many property agents are reporting greater interest, but less stock available.
The significant economic data released next week is the preliminary GDP figures. There are 3 versions of GDP, released a month apart – Preliminary, Revised, and Final. The Preliminary release is the earliest and thus tends to have the most impact and given that these figures chart the change in the inflation-adjusted value of all goods and services produced by our economy they will allow us to asses not only the accuracy of the governments figures for last year, but also the threat of inflation rising above the current 2.9% level. A GDP figure higher than forecast is usually sterling positive, so we could see the 1.15 level tested, but we do need a drive to 1.155 for the markets to stabilize around this support level.
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