Sterling weakens against dollar and euro as UK inflation data disappoints

Tom Tong17/Feb/2011Currency Updates

GBP

Sterling dropped off on Wednesday after the BoE downgraded its economic growth forecast in its quarterly inflation report even as it sees consumer prices spiking higher. Bank governor Mervyn King admitted in a letter to the Chancellor there were “real differences of view” among the Monetary Policy Committee (MPC) over how to tackle the above-target inflation and that he expected a ‘bumpy’ ride for the economy in 2011. The central bank’s February Inflation Report showed consumer price inflation spiking up to between 4 and 5 percent in the middle of this year before falling back to around 1.7 percent in early 2013, a higher forecast profile than in November.

Jobless claims in the UK unexpectedly rose in January for the first time in four months, indicating the fragility of the economic recovery at the start of the year. The number of unemployed increased in the three months to December, while pay growth remained subdued. In January, the number of people claiming jobseekers’ allowance increased by 2,400 month-on-month to 1.46 billion, figures from the Office for National Statistics showed Wednesday. Economists had expected a decline of 3,000 in jobless claims in January.

USD

The dollar bounced back against the sterling and was steady versus other major currencies on Wednesday morning after a pile of economic data was released in the US. It did, however, sink slightly overnight as Iran declared it was sending warships into Syria to rekindle tensions in the Middle East.

Housing started the data releases, which showed a much more than expected surge in the month of January, according to a report released by the Commerce Department, although the report also showed a notable drop in building permits. The report showed that housing starts jumped 14.6 percent to an annual rate of 596,000 in January from the revised December estimate of 520,000. Economists had expected housing starts to edge up to 540,000 from the 529,000 originally reported for the previous month.

Federal Reserve officials say the US economy will grow at a more robust pace this year compared with a year ago, but monetary support measures should be kept in place to ensure the recovery remains on track. The Fed raised its forecast for economic growth, predicting gross domestic product will rise between 3.4 percent and 3.9 percent, up from earlier expectations of 3.0-3.6 percent growth.

While the Labor Department also released a report on Wednesday showing that total producer prices rose roughly in line with economist estimates in January, the report also showed a much bigger than expected increase in core producer prices. The Labor Department said its producer price index rose by 0.8 percent in January following a revised 0.9 percent increase in December. Economists had expected prices to increase by about 0.7 percent compared to the 1.1 percent growth originally reported for the previous month.

EUR

The euro strengthened against sterling yesterday as UK inflation data disappointed, coming out at 4% – double that of expectations.

Portugal managing to sell EUR1bn of bills at a successful bond auction yesterday also helped lend an optimistic air to the common currency.

There was much volatility against the dollar on Wednesday on the back of a spate of US data releases. However, this was erased later on in the day with the euro recovering to reach earlier highs.

Elsewhere

The Australian economy is likely to pick up in the coming months, although an interest rate rise from the central bank is unlikely any time soon, a new survey suggested on Wednesday.

The Westpac-Melbourne Institute leading index, which indicates the likely pace of economic activity three to nine months into the future, was 4.2% higher on an annualized basis in December after advancing 3.6% in the previous month.

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Written by Tom Tong

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