In Brief
Speculation is rife about whether the Bank of England should raise interest rates.
Figures today show that UK average earnings are failing to keep up with inflation.
EU leaders did not agree to increase the EFSF bailout fund at their recent meeting.
Chinese President Hu Jintao is meeting Barack Obama in Washington.
In Depth
UK
Good morning! Inflation in the UK hit 3.7% in December according to CPI (Consumer Price Index) data released on Tuesday. Since then discussion about whether the Bank of England should raise interest rates has dominated the headlines.
On the one hand, the present inflation rate sits high above the Coalition’s target of 2.0%, and means consumers face higher prices for essential goods. On the other hand, raising the interest rate to combat inflation could upset the economic recovery.
Either way, market analysts have predicted the Bank of England will increase interest rates three times in 2011. Hence interest rates could sit as high as 1.25% by the end of the year. These predictions caused sterling to rise on the exchange markets on Tuesday, because higher interest rates mean higher returns on investments in UK bonds.
This morning meanwhile, the statistics for average earnings in the UK in November have been released, and reveal a 2.1% increase. This is negative for sterling, both because the number sits below market expectations of a 2.2% increase, and because it means earnings in the UK are falling well below inflation.
EU
The meeting between EU finance ministers to discuss increasing the size of the EFSF rescue fund came to a close on Tuesday, with no new announcements. There are two explanations floating around that account for this:
(1) EU leaders feel the crisis has diminished following successful bond auctions by Portugal and Spain last week.
(2) EU leaders are so completely at loggerheads they can’t agree a solution.
This morning for instance there are reports circulating that Portuguese Prime Minister Jose Socrates called German Chancellor Angela Merkel in Berlin last week, and begged her to tell him how to solve his country’s crisis. He had only one proviso: he would not accept an EFSF bailout.
Merkel though did not offer any advice: she simply consulted with ECB President Jean-Claude Trichet, who told her that advising Socrates was pointless, because he would not follow any guidance he was given.
Hence there could be trouble to come in the euro zone, if these reports turn out to be true.
US
Chinese President Ho Jintao’s meeting with President Obama in Washington is dominating the US landscape this morning. The meeting could prove acrimonious: US businesses are angry that China has been manipulating its currency to make it more attractive to investors, damaging the US economy.
Depending on what transpires between the two men, the US dollar could be affected.
Coming Up
The US Housing Starts data for December is released later today, indicating the number of new homes built in the US. This tells us how the US property market is shaping up. In addition the US Construction Permits data is released too.
By Peter Lavelle with specialist currency broker Pure FX.
