- Sterling remains strong after Producer prices
- UK inflation and German business confidence dominate the day
Well done to Dame Helen Mirren and Jeremy Irons for their golden
globes, well done to Andrew Flintoff and the boys for a win in the
cricket (hurrah) at last and well done the British banks and mortgage
companies for whipping fixed rate mortgages away just as they may be
useful. The old saying that a banker is someone who will lend you his
umbrella and then take it back just as it starts to rain, has such an
air of truth about it. The mortgage move comes as UK producer prices
rose, the expectation is that UK inflation (due to be announced today)
may hit 3.0 percent for the first time in 11 years and these factors
are also boosting the Pound. Traders are factoring in a far greater
chance that interest rates will have to rise further. In addition to UK
inflation numbers, we also get the German ZEW consumer sentiment index
and US empire manufacturing index. All are important and so is the
speech expected from Andrew Sentence, a voting member of the Bank of
England’s Monetary Policy Committee. Another lively day is in the
offing but news reporters are more interested in whether we all want to
remain part of the United Kingdom. The oddest part of this is that
Scotland has a parliament, Wales has a parliament, Northern Ireland
might just get a parliament if they can agree and yet there are no
plans for the most populated part of the Union, England, to have a say
in its own affairs. Isn’t that unreasonable or am I a xenophobe for
even thinking such a thing? Hold the press, UK inflation has hit 3
percent as expected; any higher and the Mervyn King will have to write
to the Chancellor to explain his lack of control on inflation. I bet
he’s quaking in his boots.
A rise in consumer confidence in Germany, whilst a minor data release
in itself, may just be the catalyst that starts the recovery of the
Euro against the Pound and US Dollar. The thinking in the markets
seems to be that the UK interest rate hike was a pre-emptive strike and
is now fully priced into the Pound along with another hike within the
first half of 2007. US interest rates are, at best, on hold and at
worst, could slide through the year and yet the European Central Bank
is playing games with the market in changing its message at the last
meeting only to revisit the notion of interest rate hikes when they
meet on 8th February. Add to this the fact that Sterling is looking
very overbought on the charts and the Euro is looking oversold on
others and we may well see a dip in GBPEUR.
The Canadian Dollar regained some strength against the US Dollar over
the last few days as the price of oil, a chief Canadian export,
rebounded from the lows seen last week and as the US Dollar itself came
under pressure after the surprise UK interest rate hike. Thankfully for
those who are planning a move to the land of the maple leaf, Sterling
is remarkably strong against both the US and Canadian Dollars and the
GBPCAD exchange rate is still in a slight upward channel. However, as
with other Sterling crosses, the fact that the Bank of England interest
rate hike is seen as a preventive move and the future of UK interest
rates is seen as perhaps one more hike and then flat, suggests that any
more good news from Canada will cause an unwinding of these great
GBPCAD exchange rates and a fall would be the inevitable consequence.
On the horizon we have Thursday’s inward investment flows and
manufacturing shipments from Canada. Both are forecast to be rather
good news for the CAD and we should be wary ahead of these releases.
Before that though, we have UK unemployment and wage growth which are
expected to be rather good for the Pound. It is fair to conclude then
that orders between now and Thursday to buy CAD may well yield the best
results for some time to come.
Perhaps all pleasure is only relief.
William S. Burroughs
FX Research and Analysis undertaken by:
David Johnson - Halo Financial
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