The Bank of England has a target inflation rate of 2% and with a forecast for inflation to rise from 1.5% to 1.6% in last night’s reading, you would be remiss to think that it was going to be a relatively ho hum evening for the British Pound. But markets love to be surprised and surprised they sure were. The headline inflation rate came in at 1.9%, a large beat in anyone’s book, the rise in inflation being mainly driven by clothing, food, non alcoholic drinks and the transport sector.
This definitely now puts the cat amongst the pigeons in one of the most talked about topics amongst the financial community, will he or won’t he raise interest rates, the he being Mark Carney the head of the Bank of England .Now this rise in inflation does not mean that 0.5% rate rise before the end of the year is a done deal. If you were to poll most analysts, they are still at loggerheads as to whether Carney will raise rates.
If you look at the price action of the Pound last night, then the initial reaction was it’s a done deal, but over the remaining part of the session investors showed a bit more of restraint. The pound came off its session highs verses the USD but held most of its gains against both the Aussie and the Euro.
Mark Carney was not the only one speaking over the last 48 hrs, Mario Draghi the head of the European Central Bank made sure he left the market in no uncertain terms as to where he stood on the Euro. He was quoted as saying that’’ a stronger euro exchange rate is a risk to the sustainability of the euro zone recovery’’.He also made it crystal clear that he has no plans to exit his position as head of the ECB.
The ECB has also faced outside pressure from the French Government to lower the Euro, as a high Euro as with all currencies puts a dent in exporters earnings as they get paid in foreign currency, and then have to repatriate those into their local currency