It’s got to be pretty tough being the Chief Economist at the Bank of England these days. The British economy remains vulnerable to the biggest spending squeeze since 1945 and probably two decades before Spencer Dale was even born. The erosion in the standard of living among Britons caused by rising food and energy costs has been further pressured by tax increases and arguably artificially inflated the cost of living. Presumably the grocery budget in the Dale household stretches far less than it used to. Minutes released from the May meeting confirmed Mr. Dale continued to favor a small rate increase leaving him increasingly isolated in his view that inflation is a problem in need of tackling.
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British pound – The May vote was unchanged with six MPC members standing firm in favor of stable policy. The minutes declared the view of the majority that raising interest rates could “adversely affect consumer confidence, leading to an exaggerated impact on both spending and firms’ perceptions of their desired productive capacity.” Presumably Mr. Dale’s researchers at the Bank have to tread on eggshells as they tiptoe between attempting to support his view and maintain their own standing with the majority of the committee including Governor King, who has recently gone to great lengths to defend an awkward position of watching inflation hover above target for 17 months. And now the agent provocateur wielding a swinging axe across the public sector and a spate of tax increases says that the central bank is doing the right thing by looking beyond short-term factors causing above target price pressures. Chancellor Osbourne today said while it is “always a matter of concern when inflation is above target,” that “the job of the independent Monetary Policy Committee is to look through temporary factors and for the medium-term trends for inflation.” If a purse-strapped Dale household, Governor King and Chancellor Osbourne isn’t a long enough list of conscientious objectors, not to mention a team of economic mandarins, the market might persuade Mr. Dale to change his mind at the next meeting. Expectations of a rate hike evaporated as far as the pound was concerned today with the unit slumping against the dollar to its weakest in six weeks. The pound last traded at $1.6146.
U.S. Dollar – The Federal Reserve releases minutes of the April 26-27 meeting later this afternoon, although the market is unlikely to be on tenterhooks for this one since Governor Bernanke faced the media for the first time following the meeting. At the time he noted that the economy still required monetary support although the need to contain inflation meant that further stimulus was unlikely. After stumbling on Tuesday the dollar has erased an earlier loss and trades higher on the day at 75.41.
Euro – A firmer tone to risk aversion was accompanied by a recovery for equity prices around the world and a rally in key commodity prices. EU Monetary Affairs Commissioner Olli Rehn tried to put the heart of the Eurozone back at the center of investors’ attention on Wednesday instead of having unfolding drama in Greece stealing the limelight. Mr. Rehn noted that the expansion base was now broader and had migrated from purely export-driven to self-sustaining domestic demand. Investors stopped pounding the euro and it managed to put in a temporary gain against the dollar for as long as buy orders clustered around $1.4250 remained unfilled. However, the single currency has turned to a loss for the session at $1.4231 ahead of New York trading.
Japanese yen – The yen snapped back at the dollar whose pull was less as global equity prices recovered. The MSCI Asia Pacific index rose by 1.1% having suffered for the past four days. A March tertiary industry index likely also argued in favor of a stronger yen as it declined by 6% having risen by 1% the previous month. The dollar slipped to ¥81.16 while the yen also rallied against the euro to ¥115.52.
Aussie dollar – Early buoyancy breaking a string of losses for the Aussie dollar soured after Moody’s rating agency lowered the rating of the nation’s four biggest lenders. Moody’s move brings the quartet in to line with S&P’s view and a one notch decline leaves the banks third from the top of the tree. A spokesman said that the reduction was consistent with its view on the structural sensitivity to conditions in wholesale funding risks. Additional pressure was placed on the Aussie, where buyers have long argued for a further rate rise or two, following first quarter data showing an unexpected dip in wage pressures. The year ended with wage costs rising at a 1% pace while pressure subsided in the first quarter to a 0.8% clip at a time when investors were braced for a pick-up in the pace. A DEWR reading of available skilled vacancies also surprised by falling 0.4% while the previously healthy reading of an increase of 1.7% was also wiped out in today’s revision. The Aussie slid to $1.0575 U.S. cents having earlier recorded a session peak at $1.0665 cents.
Canadian dollar – Earlier strength in the Canadian dollar has also vanished as a pre-market rally in equity index futures was reversed. The local dollar also slipped to buy $1.0252 U.S. cents ahead of a report likely to show a smaller pace of increase in the leading indicator series for April. Also out later is a report on wholesale sales for March where analysts expect a gain to reverse losses for February.
Andrew Wilkinson is a Senior Market Analyst at Interactive Brokers LLC
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