Good morning. Apparently the UK economy is headed for a long haul. Inflation data released yesterday broke the annualized 5% ceiling, with September CPI reaching 5.2% annually. This raises serious concerns about stagflation – a situation when the economy is stagnant, but inflation soars. Mervyn King may be forced to take a relook at the quantitative easing measures announced recently unless prices show signs of stabilization. A two-day ‘mother of all’ strike started today in Greece, ahead of the government’s further austerity measures due to be voted in parliament on Thursday. Furtger painful adjustments are on the way as Greece has lived beyond its means for far too long.
Meanwhile German newspaper Handelsblatt reported the government is considering if the euro zone bail-out fund – the EFSF, could be used to help members pay their interest expenses on their debts, citing sources. Assistance could be provided by suspending interest expenses with the European Financial Stability Facility issuing zero-coupon bonds. The Financial Times Deutschland reported Wednesday that German Finance Minister Wolfgang Schaeuble has suggested increasing the EFSF’s lending capacity to €1 trillion from the present €440 billion. This has the German politicians worried as the country – practically acting as Europe’s paymaster, will have to commit more than €211 billion, as previously agreed.
CURRENCY RATES OVERVIEW
GBP/EURO – 1.1402
GBP/US$ – 1.5716
GBP/CHF – 1.4147
GBP/CAN$ – 1.5924
GBP/AUS$ – 1.5389
GBP/ZAR – 12.5210
GBP/JPY – 120.87
GBP/HKD – 12.2498
GBP/NZD – 1.9732
GBP/SEK – 10.4232
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Euro: Germany’s economic sentiment index ZEW came out weaker than expected yesterday, pulling down the common currency. The index’s reading of -48.3 points against the expected -44.8, coupled with Spain’s downgrade – Moody’s cut Spanish sovereign rating by two notches, drove the EUR/USD pair towards the 1.3650 level. The common currency regained some ground today morning and the GBP/EUR pair is hovering around 1.1494.
USD: The high UK inflation of 5.2% – which was attributed to high energy prices, drove the GBP/USD pair down to 1.5630. The currency pair recovered to a high of 1.5760 as rumours of Germany supporting a €2-trillion EFSF fund hit the market, but slipped again as the news was later denied. The GBP/USD pair opens at 1.5740 ahead of the BoE MPC minutes.
Elsewhere, the Norwegian Krone has appreciated 2.4% in the last month. Both the AUD and NZD gained against the cable yesterday, with the GBP/AUD and GBP/NZD pairs crossing 1.5275 and 1.9720 levels respectively.
