Risk rallies on German, French agreement

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High inflation figures sent sterling tumbling yesterday ahead of today’s publication of the minutes from the Bank of England’s latest meeting of the monetary policy committee. The news that inflation was due a surge towards 5% was not unexpected, the move to 5.2% was however.

The news has been full of articles about price levels of late; from increases by utility companies to wars between supermarkets. I think we are nearing a near-term high however in inflation as the increase of VAT falls out of the figures in January. We have also seen sterling moderate its decline in the past year versus its major trading partner (the EU) which will help importers and commodity prices are slipping from their highs. I am therefore of the belief that the squeeze on incomes from price rises will start to diminish as we move into 2012 although a consequent bounce in consumer confidence will be kept under wraps by the poor 1.8% increase in wage prices.

Mervyn King also warned last night that the UK economy is not on track in a speech in Liverpool. The Governor said “We were on track, but the problems in the euro area and the marked slowing in the world economy have lengthened the period over which a return to normality is likely”. We will get a closer look at the Bank’s estimates for growth and inflation in the Quarterly Inflation Report due in early November.

Away from our island and with focus back on the European debt crisis an article in The Guardian newspaper caused optimists to get very excited yesterday evening. According to the paper, Germany and France have reportedly reached agreement that the European Financial Stability Facility will offer insurance to both private and public bondholders, which could give the fund €2trn in total lending capacity vs. €440bn currently; i.e. The leverage that we have been talking about for a while now. There is also a reported accord that banks should be recapitalized to meet a 9% core tier 1 capital ratio and that they are moving closer to agreeing on larger haircuts on privately held Greek debt. Sounds perfect eh? Well it would be if any of it had been verified but at the time of writing we have received comments from EU officials that no deal has yet been reached.

Today’s trade will likely revolve around clarification of how far talks in Europe have got and whether the Guardian report is to be trusted. The main data will be the BOE minutes from the MPC meeting held October 5-6, which led to increasing asset purchases by £75bn over the next 4 months. Our focus will be on seeing how unanimous the vote was and whether some members had been looking for more purchases. There is the possibility that other stimulus measures may have been talked about in the meeting as well. On Friday, Deputy Governor Charlie Bean indicated that the MPC has an open mind about further increases in asset purchases although this had little effect on GBP.

Indicative Rates Sell Buy
GBPEUR 1.1406 1.1433
GBPUSD 1.5747 1.5762
EURUSD 1.3791 1.3815
GBPJPY 120.78 120.94
GBPAUD 1.5289 1.5316
GBPNZD 1.9714 1.9745
GBPCAD 1.5914 1.5957
NZDUSD 0.7976 0.7995
GBPZAR 12.54 12.59
USDZAR 7.9582 7.9977
GBPPLN 4.9573 4.9897
EURJPY 105.81 106.09

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