Last week saw a mixed bag of news for the UK economy and the British Pound. UK Retail Sales expanded at a slower pace than expected, The UK trade deficit widened and the BoE held both interest rates and the QE program at £200bn.

The pound rallied to a high of 1.5888 on Friday as speculators guessed that interest rates may have to go up to combat inflationary pressures. Inflation in the UK is currently over 3% and will need to be dealt with through more ordinary monetary policy. It was a surprise to some that no change in interest rates occurred last week, most economists did however think that the Bank of England would adopt a “wait and see approach”. The Minutes from the BoE meeting will now be widely anticipated towards the end of the month to see whether there was any change in what is becoming the standard three way split.

The economic docket for this week is expected to show a rise in CPI to 3.4% in December, this could help bolster the pounds rally as the market starts to price in interest rate moves. The argument for consolidation however is that retail spending is expected to weaken to 0.3% and jobless claims in November is expected to slip 1.2k.
Although a break through the 1.60 mark is entirely possible we expect the market to consolidate as the market waits for the BoE minutes.

According to Credit Suisse the market has priced in a 50 basis point move for this year. The expectation is that the BoE will have to turn increasingly hawkish in policy decisions in order to contain the acceleration in price growth. The fundamental outlook for the UK economy is still extremely uncertain and the BoE faces some very difficult decisions.

The outlook for the Euro next week also looks very uncertain. The Euro reversed all of its losses from the open on the year last week on the news of successful bond auctions, positive liquidity measures and a more hawkish approach towards interest rates.

As for the actual probability of an ECB interest rate hike, Trichet stated at the very start of the press conference that the current rates were appropriate at the moment and that any rise in rates would severely burden a number of struggling member countries. It is unlikely that in the short term the ECB will move rates with inflation being largely centred on food and fuel costs. Trichet did however voice his willingness to fight inflation if necessary despite the fiscal and economic struggles being currently felt by a number of member countries.

Markets will probably consolidate this week with volatility still associated with news on sovereign debt risk and interest rates. If you have a currency requirement and have any questions or queries with reference to the markets please don’t hesitate to contact me.

Best Regards
Luke Zorab

Torfx Currency Dealer

“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.”