Ultra-low interest rates could soon come to an end in the UK—Telegraph

January 7th, 2010 by Toby

Pound:
The pound has fallen this morning against the majors after initially regaining recent losses as we lead up to the Bank of England decision at 12pm. We have already seen some positive news for the UK economy this morning with Halifax confirming house prices in the UK have risen for the sixth consecutive month in Dec by 1%. Prospects for the market longer term, heavily depend on how the UK economy grows and whether people holding back on selling their property decide to sell, increasing supply.

In general news ahead of today’s BoE announcement The Telegraph newspaper has released a warning that the period of low interest rates could come to an end expecting the monetary policy committee to soon show a more hawkish tone in coming months (in favour of rises) especially if inflation starts rising significantly and will disregard the looming general election.

Political uncertainty is already heating up (as the year begins) over how the £178bn deficit will be tackled in addition to kick-starting growth in the UK economy. Evidence yesterday that the service sector has expanded further has increased economists expectations that the last quarter of 2009 saw growth of 0.5-0.7% as QE continues to aid the economy and move away from the recession. There is no change expected today in QE or interest rates but the minutes of this meeting released in two weeks will be of particular interest to the market when evaluating the latest monetary stance amongst the nine committee members. Sterling remains vulnerable to concerns over how the public finance hole will be “filled again” and the election battle which looks to be heating up between now and the summer.

Jim Rogers – Uk in Big Trouble, Obama is an Economic Illiterate

US Dollar:
The Dollar was up against Sterling and the Euro this morning but remained in tight ranges before Friday’s U.S payroll data. The main movement occurred through events in Europe as moves to oust Prime Minister Brown created uncertainty in the U.K government and a drop in Sterling against the Dollar, while USD was stronger against the Euro after traders sold off the Euro to close out profits and reduce their risk before the U.S jobs data on Friday.

Minutes of the Federal Open Market Committee’s meeting, released with the usual lag Wednesday, showed that central bank officials expect a slow recovery to keep the U.S. labour market weak and consumer prices subdued. More importantly, a few members of the FOMC said more stimulus “might become desirable” given the amount of slack in the economy. That may be interpreted by market participants to mean that more asset purchases might be needed beyond the $175 billion agencies and $1.25 trillion mortgage-backed securities buying programs, scheduled to be completed by the end of March.

Investor sentiment could shift on Friday with the payroll data release, with better than expected data bringing back views that U.S interest rates could rise in the near future. GBP/ USD down to 1.5940, EUR/USD trading tightly at 1.4372.

Euro:
The Euro was up against Sterling after it was hit by uncertainty in the U.K government and down against the U.S Dollar after institutional investors in Asia took profits on the risk-sensitive currency in case U.S jobs data cause it to fall on Friday. “Selling by European banks was dominant, as such players prefer to close accounts before possible market-moving events such as Friday’s data”, said a senior dealer at a Japanese brokerage.

The Euro rose to a relatively high level earlier this week, and it will be difficult to tell how the single currency will perform after the payroll data release, so most investors are being advised to take profits and sell their Euro positions now. Such selling could particularly weigh on the risk-sensitive euro, although events in the U.K currently prevent any further losses against the Pound. Asian traders also locked in previous Euro gains this morning after the single currency saw earlier rises prompted by crude-oil prices hitting a 15 month high overnight, fueling risk appetite.Expect tight margins until the payroll data on Friday. GBP/EUR 1.1087, EUR/USD 1.4372.