The recent economic data will maintain speculation that the Bank of England will be pushed towards an early increase in interest rates. Policy uncertainty will, however, be a key feature and expectations are liable to shift several times over the next few months. There will also be fears that the Bank of England will lose control of policy which will tend to undermine Sterling sentiment. There will also be a high degree of unease over the government-debt situation and Sterling rallies will quickly attract selling pressure.
Sterling maintained a firm tone against the Euro, strengthening to 5-month highs during the week. The UK currency was also generally resilient against the dollar and held above the 1.60 level.
The latest consumer inflation data was even higher than expected with a sharp increase in the year-on-year headline rate to 2.9% for December from 1.9% the previous month and this was a nine-month high for the series. The rate will increase again for the January reading and there will be additional pressure for the Bank of England to increase interest rates.
The labour-market figures were again stronger than expected with a decline in jobless claims of 15,200 for December after a revised 10,800 fall the previous month while the ILO unemployment rate dipped to 7.8%. The data did mask underlying weakness as there was a decline in employment according to the latest figures which suggests that underlying labour demand is still weak.
The Bank of England minutes recorded 9-0 votes for interest rates and the amount of quantitative easing which was in line with market expectations. Comments from Bank of England Governor King were mixed and did not add to the speculation over higher interest rates as he stated that inflation would moderate during the first half of 2010.
The latest government borrowing data was slightly stronger than expected with a deficit of GBP15.7bn for December after a revised GBP18.7bn the previous month. This provided some degree of support for Sterling, although it was still a record deficit for the month of December.
Underlying sentiment was still fragile. Standard Life, for example, stated that the UK AAA credit rating is extremely vulnerable with the current economic and political situation described as toxic.
Swiss franc:
Euro-zone trends will continue to be watched closely and the Swiss currency is likely to gain some further defensive support from fears over the economy, especially if structural fears intensify. There will also be support if there is a sustained deterioration in global risk appetite. The National Bank will still be concerned over the implications of franc strength and there will be further intervention to curb currency gains if necessary which could trigger sharp reversals at times.
The Swiss currency maintained a strong tone against the Euro, pushing to fresh 10-month highs. The dollar strengthened to the 1.05 area against the Swiss currency before hitting tough resistance. The Euro remained under pressure during the week with a decline to test support below the 1.47 level.
The ECB announced that it would stop the Swiss franc liquidity auctions at the end of January as market conditions had improved. This provided some net support for the Swiss currency on expectations of reduced franc supply.
There was further further pressure on the National Bank to curb franc appreciation, especially as Swiss currency was still broadly firm against the dollar. |