Strong PPI data from the UK was largely ignored by the market today, with the pound waning as investors look for clarity after the Bank of England decided to keep interest rates on hold.
Clarity will surely come next week, when the BoE releases its quarterly inflation report which will include their projection for inflation and economic growth over the next 2 years.
Mervyn King, the Bank of England Governor, maintains that inflation is being driven by one off domestic factors such as the rise in VAT, and external factors over which the bank has no control such as spiralling commodity prices, but the market has already priced in an interest rate rise as the fear begins to set in that inflation is becoming entrenched.
Next week could then be a tale of sterling strength amid an extremely busy calendar. The UK’s latest inflation figures are also due on Tuesday and with a forecast of 4.1%, the hawkish policymakers are sure to have the upper hand.
In the eurozone, preliminary GDP figures are released for Europe’s powerhouses, France and Germany. If Britain’s weather afflicted GDP figure was anything to go by, we could be looking at some euro weakness as the readings undershoot expectations.
Other highlights for the week will include the publication of the minutes to the Feds latest meeting. The report is likely to strike a dovish tone with the statement following the meeting a couple of weeks ago reiterating the need to keep monetary policy ultra loose in order to accommodate a recovery in the labour market. The problems surrounding high levels of unemployment appear to be hindering the hawkish mentality of the two most recent additions to the committee.
Despite the pound’s momentum petering out slightly towards the end of this week, I wouldn’t be surprised to see the sterling bulls return as speculation for a rate rise turns to March.
Edward Knox
Analyst - Caxton FX
Edward Knox
Analyst - Caxton FX
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