UK CPI falls as Greek bailout path remains under scrutiny

Tom Tong15/Feb/2012Currency Updates

GBP

Sterling hit a 2 week low against the USD after Moody’s AAA credit rating threat saying that there was a negative outlook for the UK economy and that it looked “materially weaker” ahead of the Bank of England’s inflation report which comes out today. From this report, which is expected to be dovish, and fall in line with last weeks QE announcement we hope to get more of an indication as to whether or not the BoE is likely to partake in another round of quantitative easing over the next few months as we get the latest forecasts for growth and price in the UK.

The figure released yesterday for CPI fell to 3.6% and some say that this will justify another round of QE as early as May, although it is warned that inflation may be stickier later in the year and this fall was just due to last years’ VAT rise falling out of the index. This threat from Moody’s credit agency may also cause investors to question the safe-haven status of the UK compared to the Euro which in turn will make them think twice when switching from Euro sovereign debt into UK gilts, something which has been supporting GBP over the past quarter or so.

EUR

Eurozone officials, who were due to meet in Brussels this morning, are now just having a conference call as ministers who demanded a further 325mn Euros of austerity measures for Greece have not been given the assurances they need that the proposed cuts are viable. Greece underwent a very close inspection yesterday and it seems that even if they meet the conditions to receive the next instalment of 130bn euros they might not actually receive the funds until they prove that action has been taken due to their prior failure to hit targets.

It is ultimately up to the IMF, European Commission and ECB to decide whether or not Greece hits its targets and if not it may be necessary for National Banks in the eurozone and the ECB to forgo profits on the Greek government bonds to provide further relief, something that no doubt will be high on the agenda during tomorrows conference call. We saw a fall in European shares yesterday as retail sales in the U.S. posted a worse than expected figure and the strength of the US recovery came into question. Trading was however supported largely by an improvement in German ZEW data.

USD

Markets were relatively quiet over night and after initial losses U.S. stocks closed with little change after it was announced by a Greek government source that they will be expected to provide a letter of commitment to the new tough austerity plan that has been imposed. The weaker than expected retail sales data was in part due to a discounting in auto sales but there was a rebound in the underlying measure of sales which indicates the economy is improving. Later this evening we see the FOMC minutes which should offer a clear guide into the future of US interest rate policy and monetary policy although it is clear that the developments in Greece will be the main focus of markets today and this week.

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Written by Tom Tong

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