RationalFX: Speculation that UK will raise interest rates to 2.75% by 2012 [22/12/2010]

Yesterday’s Market Movers

• German consumer confidence came in slightly worse than expected but this had no impact on the Euro. There are more worries in the Euro-zone which has clouded confidence in the European economy as they have made people weary to spend their money. We saw EUR/USD remain at the weak position around 1.3150 level.

• We had the Public Sector net borrowing figure for UK this was expected to come in higher than the previous, predictions were correct as the figure rose by 14 billion. A large some of this was towards the Irish bailout in access of 7 Billion. Sterling fell on the back of this information and made GBP-USD trade below 1.55 ranges and made GBP-EUR go down to 1.1750.

Today’s market movers

• The BoE minutes are due today. The market will be keen to see how the members voted and if there are any other movements on interest rates and QE.

• There is already speculation that the UK will raise rates to 2.75% by 2012. This is due to the inflationary pressures, however Mr. King is still confident that this will naturally come down once the budget cuts and VAT increase takes effect.

• Raising interest rates may make the Pound more attractive, reduce external investment (help inflation), but it will also have a very negative effect on the majority of the UK population who are just about managing to pay there morgages every month! So how do you make the Pound stronger without increasing interest rates?

• Also in the UK there is the UK Current account figure which is a net flow of current transactions. A high reading is seen as positive as it proves that the flow of capital into the UK exceeds the capital reduction. However we may see sterling drop as expectations are exceeding into the negative territory.

• UK GDP (Q3) and (YoY) is a broad measure of Economic activity and we will see a lot of movement in Sterling when the figure is released.  In previous figures the GDP figure had grown, if better this will be good for the pound as it will show our economy has grown, if negative it will show the UK isn’t doing as good.

• US GDP annualized is expected to come out with a positive prediction at 2.8% from 1.7% whilst we have also have GDP price index which is also predicted to be better.

• US Existing home sales are expected to come in better than previous (yoy) however real personal consumption expenditure is expected to come out worse than previous. A mix bag of data today however if these figures come out better for the US we could see the US Dollar strengthen across the board.