The pound’s run of good form against the greenback continued today, with the price being dragged up through $1.63 as comments from the BoE governor Mervyn King yesterday did little to dampen the markets view on interest rate speculation.
Sterling came within a whisker of a 13-month high today as King exhaustedly claimed that “raising interest rates to make a gesture is self-defeating.” This followed a rather more assertive Conservative MP who lambasted the senior MPC members for wildly underestimating inflation.
Charles Bean, the deputy governor of the MPC showed signs of leaning towards the hawkish camp by echoing this sentiment in a written statement to the Treasury select committee, exclaiming his concern that this elevated inflation may well persist longer than he anticipated. This contrasts with comments from Fed Chairman Ben Bernanke who claimed that soaring oil prices pose only a “temporary threat” to inflation, which indicated to the market that the Fed will persist with its ultra-loose, accommodative monetary policy for the foreseeable future. Under this outlook, the pound’s rally could yet go further!
The threat of inflation entrenching itself in the UK do appear very real, and hence we’re seeing the market price in a near-term rate rise. But are the arguments about the fragility of the economy still stacking up?
Recent figures suggest that the UK economy has rebounded strongly in the first quarter of 2011, offsetting Q4s disappointment. Positive data from the construction industry, released earlier today, followed equally upbeat manufacturing data earlier in the week. These two sectors combined account for around 20% of our GDP. If data from the services sector tomorrow completes the picture, the UK economic recovery will certainly look to be gathering some momentum.
As far as “cable” (GBP/USD) goes then, we could well be seeing these dizzying heights sustained, with the next tough resistance level seen at 1.6450. However, against the equally well-performing single currency the story may be slightly different. The market is expecting some hawkish comments on inflationary pressures from ECB president Trichet in the ECB press conference tomorrow. Such comments look set to keep the €1.20 level out of the picture for the time being.
Ewdard Knox
Analyst - Caxton FX
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