NEWS / Foreign Exchange

Pound Stays Hot As Wage Pressures Rise

Talking Points

??? New Zealand Dollar: Inflation bit tamer than expected but still strong
??? Euro: Construction Output at double digits
??? British Pound: Wage Pressures create speculation of 2 rate hikes
??? US Dollar: Only MBA on tap

Pound Stays Hot As Wage Pressures Rise

The pound was once again the lead story in the currency markets tonight as UK data continued to impress with better than expected employment and wage data that sparked speculation of possibly two rather than just one near term rate hikes from the BoE UK employment printed at -9.2K versus -5K anticipated while wages climbed to 4.6% from 4.2% forecast. The news was just the latest piece of data that confirmed widespread price pressures in the UK economy at the producer, consumer and wage level.

The release of the BOE minutes tonight was much more muted in its assessment of inflation risk, as policymakers noted only ???little pickup in pay pressures,??? but at the time of the meeting the UK monetary authorities were not privy to the latest reports and their view is likely to grow progressively more hawkish given their review of the latest data. Tonight??™s minutes revealed that the MPC members voted 7-2 to keep rates steady, with Besley and Sentence voting for 25bp hike.

At the very least the market now expects a rate hike in May, which would take cable rates to 5.50% exceeding US rates for the first time since March of 2006. Although some traders forecast another rate increase soon after May, we do not agree. Given BOE??™s earlier statements that ???a closely spaced series of interest rate increases might lead to excessive tightening??? we believe that the UK central bank may pause for several months to observe the impact of their actions before considering another round of tightening. Nevertheless, tonight??™s news certainly proves positive for sterling which appears to be on the clearest path towards higher rates amongst all of the major currencies.

In US today, the calendar is practically empty with only the MBA mortgage applications on the docket. Yesterday??™s tepid US inflation numbers which showed only a 0.1% rise in core have tempered any expectation of possible Fed rate hike in the near future. In the meantime tonight??™s EZ Construction Output data recorded a double digit year over year gain and the unit rose further against the dollar in its inexorable climb to retest the all time highs. With US rates now projected to be flat and US economic data continuing to register lackluster performance, the greenback in a deep funk and it difficult to see what will change market sentiment save for a bout of some profit taking.