Inflation-Tainted Data May Turn Pound Up Again
12.02.07 09:15:00 CET
LONDON (Dow Jones)--Sterling's sharp decline late last week may well provide a buying opportunity for the U.K. currency later this week.
Much has to do with the market's shifting expectations for U.K. interest rates
and the risk that inflationary pressures in the U.K. economy will peak sooner
than expected.
The Bank of England helped to signal that inflation was under control when it
left rates unchanged last Thursday, disappointing some players in the market
who were looking for the bank to repeat January's surprise 25- basis-point rate hike.
Although the bank didn't issue a statement to explain its decision, its
announcement that rates were being left unchanged at 5.25% coincided with an announcement by Centrica, the parent company of British Gas, that it will be cutting gas prices March 12 by 11% and electricity prices by 17%.
The cuts were both larger than forecast and will take place sooner than
expected. They are also likely to be matched by other energy suppliers.
This immediately led to speculation that inflation pressures on the British
consumer will subside sooner rather than later and that there will be less
pressure on the central bank to continue hiking rates.
Steve Pearson, a senior currency strategist with HBOS in London, pointed to
the sharp rally in sterling interest rates futures as evidence of the reduced
expectations for U.K. interest rates since the Bank of England meeting.
"This confirms that the January rate increase was simply the February increase brought forward," he said.
Sentiment towards sterling, meanwhile, wasn't helped by other U.K. data
showing that the country's trade gap widened to GBP7.1 billion in December from GBP6.9 billion in November.
Also, analysts pointed to a reversal in recently positive mergers and
acquisitions flows and a general market appetite for profit-taking.
Phil Roberts, a technical strategist with Barclays Capital in London, pointed
to the sharp decline in the Australian and New Zealand currencies - which also offer high yields like the pound.
"The market (was) in a feeding frenzy ahead of the weekend," he said.
"We don't think this is a coincidence, rather we view it as further evidence
of profit-taking," Roberts added.
All in all, this was enough to push the pound down by over two cents against
the dollar - destroying any hopes that sterling might make another early test
of $2.000.
However, some analysts reckon that there could be enough data this week to
turn sterling sentiment back up again.
"We buy cable on the dip," stated Ian Stannard, a senior currency strategist
with BNP Paribas in London, in a recommendation to clients suggesting that U.K. inflation risks haven't gone away.
For a start, he notes that wholesale gas prices have already retraced much of the declines seen in December and suggests "that energy price reductions might be temporary."
And this week's data could show higher price pressures in the pipeline.
"The key will be (this) Wednesday's January labor market report. Strong wage
data will readjust market rate expectations again," said BNP Paribas' Stannard, noting that the markets are only pricing in a 70% chance that rates will go up again in March.
While the rate of unemployment is expected to stay stable a 5.5% in December, average earnings are expected to have risen 4.2% that month, up from 4.1% in November.
The market is also expected to look at the latest inflation numbers, which are
expected to show that while the January consumer price index fell to 2.9% from 3.0%, the retail price index still ticked up to 4.5% from 4.4%.
Also key to market expectations will be the Bank of England's own Inflation
Report Wednesday. This report will have been used by the bank in its
deliberations to leave rates unchanged last Thursday.
Robin Wilkin, a technical analyst with J.P. Morgan in London, pointed out that
despite the sharp decline, the pound had failed to break down under any key
levels.
But, he added, "the rate and depth of the move is going to provide a great
opportunity to step back into sterling longs."
While sterling rebounded to $1.9549 early in Europe Monday from $1.9508 late Friday in New York, according to EBS, the yen was finding itself back under selling pressure after the Group of Seven finance ministers' meeting in Essen, Germany, over the weekend failed to make any explicit mention of the Japanese currency's weakness.
Although the final communique pointed to the risks of "one-way bets" in a
direct reference to carry trades, this wasn't enough to stop investors selling
the low-yielding yen against its higher-yielding counterparts, now that any
sort of concerted action by G7 appears unlikely.
The dollar rose to Y121.89 by 0745 GMT from Y121.65 in New York. The euro also rose to Y158.90 from Y158.23. At one stage, the single currency hit a new record high at Y159.00.
12.02.07 09:15:00 CET
LONDON (Dow Jones)--Sterling's sharp decline late last week may well provide a buying opportunity for the U.K. currency later this week.
Much has to do with the market's shifting expectations for U.K. interest rates
and the risk that inflationary pressures in the U.K. economy will peak sooner
than expected.
The Bank of England helped to signal that inflation was under control when it
left rates unchanged last Thursday, disappointing some players in the market
who were looking for the bank to repeat January's surprise 25- basis-point rate hike.
Although the bank didn't issue a statement to explain its decision, its
announcement that rates were being left unchanged at 5.25% coincided with an announcement by Centrica, the parent company of British Gas, that it will be cutting gas prices March 12 by 11% and electricity prices by 17%.
The cuts were both larger than forecast and will take place sooner than
expected. They are also likely to be matched by other energy suppliers.
This immediately led to speculation that inflation pressures on the British
consumer will subside sooner rather than later and that there will be less
pressure on the central bank to continue hiking rates.
Steve Pearson, a senior currency strategist with HBOS in London, pointed to
the sharp rally in sterling interest rates futures as evidence of the reduced
expectations for U.K. interest rates since the Bank of England meeting.
"This confirms that the January rate increase was simply the February increase brought forward," he said.
Sentiment towards sterling, meanwhile, wasn't helped by other U.K. data
showing that the country's trade gap widened to GBP7.1 billion in December from GBP6.9 billion in November.
Also, analysts pointed to a reversal in recently positive mergers and
acquisitions flows and a general market appetite for profit-taking.
Phil Roberts, a technical strategist with Barclays Capital in London, pointed
to the sharp decline in the Australian and New Zealand currencies - which also offer high yields like the pound.
"The market (was) in a feeding frenzy ahead of the weekend," he said.
"We don't think this is a coincidence, rather we view it as further evidence
of profit-taking," Roberts added.
All in all, this was enough to push the pound down by over two cents against
the dollar - destroying any hopes that sterling might make another early test
of $2.000.
However, some analysts reckon that there could be enough data this week to
turn sterling sentiment back up again.
"We buy cable on the dip," stated Ian Stannard, a senior currency strategist
with BNP Paribas in London, in a recommendation to clients suggesting that U.K. inflation risks haven't gone away.
For a start, he notes that wholesale gas prices have already retraced much of the declines seen in December and suggests "that energy price reductions might be temporary."
And this week's data could show higher price pressures in the pipeline.
"The key will be (this) Wednesday's January labor market report. Strong wage
data will readjust market rate expectations again," said BNP Paribas' Stannard, noting that the markets are only pricing in a 70% chance that rates will go up again in March.
While the rate of unemployment is expected to stay stable a 5.5% in December, average earnings are expected to have risen 4.2% that month, up from 4.1% in November.
The market is also expected to look at the latest inflation numbers, which are
expected to show that while the January consumer price index fell to 2.9% from 3.0%, the retail price index still ticked up to 4.5% from 4.4%.
Also key to market expectations will be the Bank of England's own Inflation
Report Wednesday. This report will have been used by the bank in its
deliberations to leave rates unchanged last Thursday.
Robin Wilkin, a technical analyst with J.P. Morgan in London, pointed out that
despite the sharp decline, the pound had failed to break down under any key
levels.
But, he added, "the rate and depth of the move is going to provide a great
opportunity to step back into sterling longs."
While sterling rebounded to $1.9549 early in Europe Monday from $1.9508 late Friday in New York, according to EBS, the yen was finding itself back under selling pressure after the Group of Seven finance ministers' meeting in Essen, Germany, over the weekend failed to make any explicit mention of the Japanese currency's weakness.
Although the final communique pointed to the risks of "one-way bets" in a
direct reference to carry trades, this wasn't enough to stop investors selling
the low-yielding yen against its higher-yielding counterparts, now that any
sort of concerted action by G7 appears unlikely.
The dollar rose to Y121.89 by 0745 GMT from Y121.65 in New York. The euro also rose to Y158.90 from Y158.23. At one stage, the single currency hit a new record high at Y159.00.
