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Wednesday February 20, 2008 - 11:37:51 GMT

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Forex Research - Pound Drops on Conflicted MPC Meeting Notes, Will Dollar Benefit From Hot CPI?

Wednesday, 20 February 2008 11:29:01 GMT

Written by Boris Schlossberg, Senior Currency Strategist

The pound dropped to 1.9450 after February’s MPC minutes revealed that David Blanchflower, the most dovish of UK monetary authorities, voted to cut rates by full 50bp rather than 25bp.

Talking Points

•    Japanese Yen: Firms on fears over KKR slip in Nikkei
•    Euro:  Holds above 1.4700 after hot PPI data
•    British Pound: Drops to 1.9450 on conflicted MPC report
•    Canadian Dollar: International Securities on tap
•    US Dollar: CPI on tap

Pound Drops on Conflicted MPC Meeting Notes, Will Dollar Benefit From Hot  CPI?

The pound dropped to 1.9450 after February’s MPC minutes revealed that David Blanchflower, the most dovish of UK monetary authorities, voted to cut rates by full 50bp rather than 25bp preferred by rest of his colleagues. The news took traders by surprise  suggesting that concerns about the health of the UK economy may expedite BoE’s easing policy. For the time being most analysts forecast no change in short term rates at the next meeting in March. However, if tomorrows UK retail sales data shows yet another subpar print indicating further deterioration consumer demand, UK monetary officials may conclude that they have no choice but to follow the Fed and cut rates aggressively at every meeting of the MPC.  

BoE officials are deeply conflicted between their desire to avert a serious slowdown in the UK economy and their mandate to control inflation which continues to rage at least on the producer level. However as we noted a few weeks back, “despite escalating price pressures on producers, pricing power in UK economy remains remarkably weak as consumers, burdened by record debt are beginning to curb spending. “ UK Retail sales have contracted for 2 out of the last 3 months and should they do so again, the pressure on the BoE to cut rates in March may become intense. Needless to say, none of this news is supportive of the pound and the unit could experience further waves of selling unless the data tomorrow demonstrates some resilience on the part of the UK consumer.

Meanwhile inflation remains the key theme across the G-10 universe. Tonight German Producer prices printed far stronger than expected at 0.8% vs. 0.3% forecast signaling that price pressures continue to plague the Euro-zone. As a result tonight’s report will likely reinforce ECB’s restrictive stance despite growing evidence of a slowdown in the region.

In US today,  traders will keep their attention focused on CPI data due at 13:30 GMT. The numbers are projected to match last months 2.4% pace but any upside surprise  could spur speculation that Fed’s ultra easy monetary policy is stoking the flames of inflation. With core readings already above the Central Banks target of 2% while headline data hovers above 4.2%,  the dangers of runaway prices have increased markedly.  Dr Bernanke and company may therefore find themselves facing the unpleasant choice of either further aggravating inflation or risking the possibility of a US recession. Clearly the closer the Fed moves to 0% interest rate level the more perilous the situation becomes.  A hot CPI number therefore may force US policymakers to temper their easing perhaps lowering rates by only 25bo rather than the 50bp already priced in. That in turn may help the dollar find some support especially against the yen

Will dollar rise against the yen? Join us in the USD JPY forum

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