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FX Day Trading - 17 August 2010
Will inflation still be above target this morning?
And how long will it remain there?
And what will the Bank do about it?
Dear Chancellor,
Forgive me for I have sinned. It is three months since my last confession and in that time I have failed to keep my promise to hold inflation within one percentage point of 2%. Even more wickedly I have failed to make any effort whatsoever to hit that target. No rate increase, no quantitative tightening, no nothing. Mea maxima culpa. Well, maybe not maxima, but culpa sum nevertheless.
I suppose it would be a sin of pride to speak on behalf of my Monetary Policy Committee but, since I am already in the soup, here goes: they have eight votes, I have one vote, it is not entirely my fault.
And look, you are not helping matters either. If I raise the Bank Rate it will not stop you putting VAT up. Nor will it bring down the price of wheat or beef or petrol. It will not even discourage people from buying staples, any more than preaching to the banks will persuade them to lend money to borrowers who won't pay it back. The lesson of the last three years is not one that the banks can easily unlearn.
So here's the deal. I will not rock the economic boat by adhering rigidly to the inflation target and you will stay off my back. Expect to hear from me again in three months' time.
I will place this letter on the Bank of England's website for public dissemination.
Yours sincerely,
An Aston Villa supporter
Of course it could be that the consumer price index in July was less than 3% higher than it was in the same month last year. The letter might not have been sent. The inflation figure is one of those quantum economic events that only crystallises when you see it. The governor and the chancellor knew yesterday what today's number will be but, for the rest of us, it will not be until half past nine that we find out. Until then, like Shrödinger's cat, inflation is both alive and dead.
The inflation figures will be the most important event for the Sterling spread betting today, even though they have no direct relevance to interest rates. It is possible that a sub-3% CPI inflation figure could have a negative effect on the Pound. However, there can be little doubt that, wherever it goes in the next couple of months, it will be up here again at the beginning of next year after the VAT increase bumps up retail prices by 2.1% at a single blow.
As for the rest of today's events, ZEW's survey can reasonably be expected to show stronger economic sentiment in Germany even if that improvement does not carry across to the rest of Eurozone.
US housing starts and building permits might have gone up in July but investors are under no illusion that the residential property sector in the States is in any better shape than it is elsewhere around the world. Yesterday's National Association of Home Builders' housing market index went down from a horrid 14 to an even nastier 13, its lowest level since March last year, despite the NAHB having spent $600k on lobbying in the second quarter of the year.
Canadian manufacturing shipments are likely to have fallen in June, in keeping with the fall in export volumes and prices that was reported in last week's trade figures.
US producer prices are even less relevant to the Dollar than the CPI inflation figures should be to Sterling; US rates are not going anywhere for a while. The US industrial production and capacity utilisation data are more important, given their connection to activity in the biggest economy in the world.
A perfect combination for Sterling today would involve a CPI inflation rate above 3%, a weak reading of German and Eurozone economic confidence and strong figures for US housing starts, building permits and industrial production.
Oh, and a letter to the chancellor promising to clamp down on inflation through a series of ruthless interest rate hikes.
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'FX Day Trading 17 Aug 2010', Article by Moneycorp, last update: 17-Aug-10
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