Interest Rates
Sterling Conundrum We have used this title before. But the fact remains that the technical and fundamental outlook for the short sterling market is still somewhat different. Instead of reacting to poor retail sales data, and growth figures well below Mr Brown’s assumptions, the June 2006 contract has taken its cue from the eurodollar market, and headed south, hitting a low last week of 95.56.
This equates to a three-month interest rate of around 4.50%, which is where the base rate currently stands. The reason, as we know, is the inflationary pass through of higher oil prices, which have caused headline CPI to jump to 2.4% y-o-y, a reading which is above target and above the forecast in the Bank of England’s latest inflation report. Governor King has not helped by saying that no more than half of the pick-up in inflation can be explained by oil prices, and that other factors are at work, such as the demand on capacity over the past two years.
Looking at the June 2006 contract, there is clear support at 95.55 on the daily chart – we actually expect a short-term bounce over coming days – and major support 95.45 on the monthly chart. A break of this latter level would have rather negative connotations in technical terms, implying rate hikes.
No, we run with a fundamental view on this one, and point out recent remarks from MPC members Walton and Tucker. Although they highlighted that the Bank of England might find it increasingly difficult to react to a weaker economy if inflation was to remain stubbornly high, the implications are that they realise economic growth is one the wane. As such, while the central bank may remain on hold for a while longer, the need for a rate cut may become quite acute, especially if no action is taken over the remainder of 2005. Bye bye sterling!
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