ļMarkets are still sceptical about the Greek
ļUK inflation accelerates
markedly, but BoE governor Mervyn King seeks to reassure
ļStrong GDP growth in China increases likelihood
of monetary policy tightening
ļUS president Obama wants
to impose massive restrictions on banksā activities
ļFOMC could turn slightly more hawkish
The dollar remained firm for the most part this week.
EUR-USD fell to a 6-month low of 1.4029 on Thursday, before recovering again somewhat on Friday to
around 1.41. The movement is mainly a result of inherent weakness in the
eurozone. A disappointing ZEW index, guarded comments on the economy from ECB
members, and the constant discussions among market participants about Greeceās debt crisis and its potential consequences for the
currency union and the EU are all spreading doom and gloom.
UK consumer price data also had a significant impact on the
forex market. UK inflation accelerated from 1.9 to 2.9% in December,
reflecting the renewed rise in energy prices on the one hand and the base
effect of the VAT cut in December 2008 on the other. Some retailers are likely
to have already raised prices ahead of the return to normal VAT rates in
January, which probably also played a part. Prices have increased much more
sharply than predicted in the BoEās November Inflation Report, however. Given
the VAT hike in January, the inflation rate is set to rise well over 3%.
The inflation figures are prompting speculation as to
whether the Bank of England could start
tightening monetary policy sooner than expected. The pound
also strengthened on the back of the assumption that it would benefit from the Greek crisis.
EUR-GBP dropped around 3 pence temporarily to 0.8650; cable rose to a peak of
1.6460. By forecasting that the inflation rate would return to the 2% target
again in the medium term, the BoE governor Mervyn King at least put paid to speculation
on interest rate hikes for the time being, as there would then be no immediate
need for the BoE to take monetary policy action.
There is not much news about Greece. At the beginning of the week, EU finance ministers discussed
the problem. Their comments on the Greek savings plans were somewhat
restrained. The Greek government is trying hard to build up confidence.
Meanwhile, spreads between Greek government bonds and Bunds have widened to new
record highs. The developments in the markets appear to be somewhat
exaggerated, but there is little hope of the situation calming down in the near
This week, the dollar received indirect support from China. Firstly, the government in Beijing reported strong GDP growth of 10.7% in Q4 . Secondly,
several official spokesmen omitted the customary reference to maintaining a āmoderately
loose monetary policyā. Observers interpreted this as a sign that the Peopleās
Bank of China is planning further measures to tighten monetary policy.
US economic data did not have much impact this week. The
figures published continued to confirm the guardedly upbeat assessment. Then, towards
the end of the week, President Obama dropped a bombshell: in a short, tough speech, he outlined
his plans to reform the banking system. Firstly, he proposes to restrict banksā
business activities: they would no longer be allowed to own, invest in or
sponsor hedge funds, private equity funds or proprietary trading operations for
their own profit unrelated to serving their customers. His second aim is to
limit the size of banks, by restricting market shares for deposits, for
example. If these proposals are implemented, they will place massive
restrictions on banksā activities.
Next week, the focus will be on the FOMC meeting. Given the
positive trend in Q4, we are expecting the central bank to raise its economic assessment
again slightly. It could also modify
the statement that the economic situation warrants keeping
central bank rates at exceptionally low levels for an extended period.
Stephan Rieke +49 69 718-4114
Grabbe / Klaus NĆ¤fken
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