The prices of goods leaving UK factory gates rose at their fastest in 14 months in the year to February and at more than double their average rate than over the past decade, according to official figures published on Friday.
The Office of National Statistics reported that manufactured output prices as measured by its producer price index rose by 4.1% in the year to February, up 0.3% points from an inflation rate of 3.8% in January.
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Sterling made some brief gains yesterday but traded fairly flat throughout the day. The European Central bank held their current interest rates at 1% which was expected. Whilst the Bank of England left their base rate at 0.5% for the 12th month in a row, and also held its asset purchase programme at £200bn, again as expected.
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Sterling was under attack from all angles yesterday morning as traders and investors sold off the pound as if it was due to become worthless. Two main factors lead to sterling at one point approaching its biggest one day drop in over a year.
Firstly, a report over the weekend in the Sunday Times suggested the existing Government may win more seats in parliament even if the Conservative Party win more of the popular vote. The talk of a potential hung parliament returned to the forefront of trading floor gossip. With the election getting closer, the implications of a hung parliament would make it nearly impossible to pass controversial or unpopular plans to cut the ballooning budget deficit. Decisions that would usually have been decided during cabinet meetings could potentially take weeks, if not more, to pass through the House of Commons.
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Sterling was under pressure from the start of yesterday’s session after comments from BoE Governor Mervyn King weighed on Sterling. King’s testimony to the Treasury Select committee undermined sterling when he expressed concerns about the fragility of the recovery and left the
door open to further quantitative easing if the need arose. When asked whether further Quantitative Easing would be needed, King said, “We’ll have to see how things pan out. My particular concerns at present derive from the state of the world economy, and we stand to do whatever seems appropriate”.
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Sterling started Monday morning on the back foot but made slight gains throughout the day’s trading despite recent weak economic data, poor public finances and more talk of a hung parliament in May.
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Yesterday saw a mixed day for sterling gaining against the US dollar but suffering losses against the euro.
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IN THE UK
· House prices rise 6.1% last year
· Inflation set to tip 3.0% in today’s announcements
· Bank of England minutes out tomorrow
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Sterling’s recent bad run against the major currencies continued yesterday, after an unexpected increase in UK Goods Trade Deficit. The figures came in at -£7.3bn, a £0.7bn worse than expected figure which dropped investor confidence, and weighed on Sterling as this suggests that the economy may not have progressed as expected, since the UK exited the recession.
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Sterling fell further against the US Dollar yesterday as the pound struggled due to an increase in risk aversion triggered by continuing concerns over the financial health of some of the Euro-zone countries. Concerns about how Euro-zone countries such as Greece and Portugal will service their debts have driven investors away from riskier assets such as sterling. This also serves as a reminder about Britains own financial problems and is likely to keep sterling under heavy selling pressure.
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UK
Risk aversion continues with momentum. The Pound has extended its decline against the Dollar and recently fell below 1.5600 for the first time since May of 2009. The pair is falling sharply for the third consecutive day accumulating a decline of more than 400 pips.
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