Market Review – 15/02/2011 19:36 GMT
Cable rallies on Tuesday on future rate hike expectation
The British pound rose broadly on Tuesday as rate hike expectation increased after U.K. data showed a thirteenth consecutive month of inflation rate which was above the upper target of the Bank of England (BoE). UK CPI rose to 4.0 percent (y/y) in January from 3.7 percent in December, in line with economists’ consensus forecast but double of the BoE target rate. The persistently high inflation in Britain forced BoE Governor Mervyn King to write a letter to Chancellor of Exchequer George Osborne.
In the written explanation of its position on higher prices, BoE Governor Mervyn King, on the whole, sticks to his view that prices would rise more and that the Central bank will act as needed on rates. He also said there was uncertainty about the medium-term outlook and differences of views on the Monetary Policy Committee about the balance of risks but that members were determined to act if necessary. In reply to King’s letter, Osborne said he welcomed the MPC’s determination to act to keep inflation in check if needed.
The British pound rebounded strongly from session’s low of 1.6008 in Europe after the release of CPI data and despite initial knee-jerk movement, price subsequent rallied above Monday’s top of 1.6080 and touched a high of 1.6172 in early New York trading before easing on some profit taking. The pound also strengthened against the euro and Japanese yen, and eur/gbp dropped to a four-week low of 0.8357 whilst gbp/jpy surged to a six-month high of 135.46.
The intra-day rally in cable also pushed the single currency higher against the dollar and eur/usd rose to a high of 1.3551 in New York before dropping again on renewed cross-selling in euro. Eur/chf penetrated Monday’s low of 1.3053 to a session low of 1.3037 while eur/jpy was off from its session high of 113.40 to trade around 113.10/20 level ahead of New York closing.
Higher US treasury yields increased the appeal of the dollar versus the yen in recent weeks and the greenback rose above January’s high of 83.70 against the Japanese yen to a session’s high of 83.93 before easing on lower-than-expected US retails sales, while dollar dropped to a low of 0.9650 against the Swiss franc on active cross-buying.
On the data front, US retail sales rose less than forecast in January, increased 0.3 percent against the economists’ expectation of a rise of 0.6 percent and 0.6 percent gain in December. The sales data suggested winter snowstorms may have played a role in the slowdown as Americans stayed away from restaurants and home-improvement stores. Business inventories in December rose to 0.8 percent from 0.2 percent in previous month and compared to expectation of an increase of 0.6 percent, while the National Association of Home Builders/Wells Fargo said its sentiment index registered a reading of 16 in February for the fourth consecutive month, in line with the median forecast of economists.
Economic indicators to be released on Wednesday includes:
Australia Westpac leading economic index, Japan Tertiary industry index and Bank of Japan monthly economic report, UK Claimant count, ILO unemployment rate, average earnings and Band of England quarterly inflation report, and US building permits, housing starts, PPI data, Capacity utilisation, industrial production and FOMC minutes of January 25-26 meeting.