Sterling gains from Bank of England split

Sterling moved higher yesterday after the minutes of the Bank of England's last monetary policy committee meeting revealed that members were closely divided over this month's interest rate cut and that governor Mervyn King was outvoted for the first time since the committee was formed eight years ago.

Reinforcing last week's hawkish inflation report, the minutes showed that the MPC voted by five to four to cut rates by 25 basis points to 4.5 per cent in August and emphasised that the reduction did not herald the start of a downward trend.

Charles Bean, BoE chief economist, who had voted for a cut in July, and the external members of the committee supported the move.

Rachel Lomax and Andrew Large, deputy governors, and Paul Tucker, executive director, joined Mr King in dissent, putting the MPC chair in the minority.

"It was quite shocking," said David Bloom, currency strategist at HSBC. "Usually hawkish sentiment is good for sterling but if it comes at the expense of divisions at the central bank then it's less sterling-positive. This could create volatility in the interest rate and sterling market, with everyone rushing to the latest set of data."

Data released by the Office of National Statistics confirmed that the UK labour market continued to soften in July, with the number of people out of work and claiming unemployment benefit rising for the sixth successive month. Earnings growth remained muted in June at 4.2 per cent, in line with expectations.

The Pound reached six-week highs against the euro, gaining 0.5 per cent to £0.679, its highest since before the bomb attacks in London on July 7. The pound reversed early losses against the dollar to stay flat at $1.8098.

The dollar remained rangebound following the release of strong US producer price inflation data, which showed the headline PPI rising 1.0 per cent in July, about twice as fast as expected, after a flat outcome in June.

Surging energy prices accounted for about 60 per cent of the gain, but the core measure, which excluded food and energy, jumped 0.4 per cent in July, against expectations of a 0.1 per cent increase, with price increases in other commodities bleeding through to producer prices.

The greenback rose 0.4 per cent against the euro to $1.2295 after striking two-week highs, and gained 0.9 per cent to C$1.2086 against its Canadian counterpart.

The yen came back from early losses against the dollar to strengthen fractionally to Y109.51 as the benchmark Nikkei equity index finished down 0.35 per cent, despite hitting a four-year intraday high. A poll put Japanese prime minister Junichiro Koizumi's approval rating at 51 per cent, up from 46 per cent, with the market already pricing in a clear election victory and solid economic growth in the second half of the year.

Elsewhere, the Swiss franc ticked higher following hawkish comments from Swiss National Bank board member Niklaus Blattner, who warned that interest rates could not stay at current low levels for long given the promising economic outlook for the Swiss economy.

The franc gained 0.1 per cent to SFr1.5488 against the euro, but slipped 0.3 per cent against the dollar.

Dissent within the MPC assists sterling gain

The minutes of the Bank of England’s last monetary policy committee meeting were released yesterday. For the first time since it’s inception eight years ago, Mr Mervyn King, the MPC governor, was outvoted 5-4 in favour of cutting rates by 25 basis points to 4.5% in August.

The closely divided vote emphasised that the cut was more of an anomaly, and reinforced the market opinion that rates will now likely remain unchanged for the rest of the year.

Data from the National Statistics office confirmed the continued softening of the UK labour market in July. For the sixth consecutive month new claimants numbers rose.

The pound reached six-week highs against the euro, gaining 0.5% to £0.679. This was notably the highest since before the bomb attacks on July the 7th. Sterling reversed earlier losses against the dollar to finish flat at $1.8098.

The dollar remained range bound following the stronger than expected US PPI numbers released yesterday. The producer price inflation data saw the headline rate rising 1.0% in July. This was twice as fast as was anticipated by the market. The main reason for the rise was the souring price of energy. Many are now asking how long US retailers can continue to absorb these higher costs.

Key economic data due out today include UK retail sales (9.30am BST). The expectation is that July will see a contraction of 0.8% bringing annual retail sales growth to 1.8%. EMU CPI inflation is expected to show a 0.1% increase to 2.2% for June. Also due out today are US jobless claims (estimate of 315k) and industrial production for June. The market is expecting 0.3% in US manufacturing.

Sterling rises as further UK rate cuts look more unlikely...

Consumer price inflation hit a record high yesterday, rising at it’s fastest pace since records began back in 1997. The data showed that UK price inflation climbed above the governments target to 2.3% in July.

The market had forecasted 0.1% increase from June’s 2.0%. The rise was partly due to higher oil prices but offsetting summer retail discounts helped to reduce the overall increase. Service sector inflation also rose to a two and a half year high of 4.5%.

The statistics further diminish prospects of interest rate cuts before the end of the year following the 25 basis point reduction to 4.5% in August. Sterling gained 0.2% against the euro to reach 0.6812, stayed relatively flat against the yen at Y197.74 and gave up early gains against a resilient dollar to close at $1.8090.

News from the Royal Institute of Chartered Surveyors that UK house prices fell in July at their slowest pace for five months, also helped buoy the pound.

The dollar crept higher on the back of US inflation data that showed headline prices rose by 0.5% from the previous month, against a forecast of 0.4%. The greenback steadied on news that industrial output rose by 0.1% month on month in July.

Today’s sees the release of the MPC minutes. The reasoning behind the cut had been clear; GDP growth had slowed more sharply than anticipated, but it’s the level of consensus that will be eyed to see how members voted. Most commentators predict a 7-2 split.

UK unemployment figures are due out at 9.30am this morning. Most analysts are predicting the claimant count to continue its rising trend in June. This will have been the 8th rise in the past eleven months.

US Treasury data boosts dollar

The two-month dollar slide against the euro abated somewhat yesterday. The release of June’s US Treasury International Capital Data showed that net capital inflow numbers came in at $71.2bln.

The figure, which was well ahead of the consensus expectation of $65bln is seen as adequate to cover June’s trade deficit which had been worst than expected at $58.8bln. The greenback had been sliding from an early July high of $1.1880 against the Euro to $1.2465. It clawed back to $1.2366.

In the UK, the London bombings and attempted bombings in July seem to have taken their toll on retail sales. A report released yesterday by the London Retail Consortium showed that underlying sales dived 8.9% in July year-on-year. The preceding month had seen a 3.6% rise.

The pound managed to rise against the euro however, still buoyed by last week’s quarterly inflation report, which quelled market expectations of medium term interest rate cuts. Attention will focus on tomorrow’s release of the minutes from last weeks MPC meeting. Sterling rose 0.3% against the euro to .6832 but fell off against the dollar to $1.8080.

The markets will be eyeing the release of today’s US inflation figures due out at 1.30pm BST. Headline CPI could rise 0.5%, boosted by higher prices for gasoline and natural gas, pushing year-on-year inflation from 2.5% to 3%. However core inflation is likely to remain benign rising just 0.1%, mainly because of the disinflationary effect of car price discounting by Ford and GM.

Also due out today is the UK CPI figures for July (9.30am BST). The inflation figures are expected to come in at 2.0%. Heavy discounting from retailers on the High street, for household goods and clothing, is likely to be offset by higher petrol and other energy costs.

Will the recent oil surge affect inflation trends?

Inflation- this is the question most analysts will be focusing in on in the coming week.

The nominal price of crude oil hit a record level of $66 a barrel in New York trade on Friday. The markets had reacted to earlier warnings of terrorist attacks in Saudi Arabia, the world’s largest oil producer.

With Iran declaring it was renewing it’s nuclear programme, analysts fear that potential UN sanctions could affect supply. Some have even forecasted $100 a barrel by year end if a supply shock were to happen in the Middle East.

US June inflation figures are due out tomorrow. The consensus forecast suggest a rise of 0.4% on the month, which would push year-on-year headline inflation from 2.5% to 3%.

Core inflation should remain relatively benign as the discounting on new cars by the larger US producers results in lower prices. This is also set to help reverse the recent drag on US manufacturing output which is due out tomorrow as well. July’s figures are expected to rise by 0.3% on the month.

The upsurge in higher petrol prices and energy costs are likely to have put upward pressure on UK inflation figures for July, which are due out tomorrow. This is widely expected to be somewhat offset by heavy discounting by retailers, largely in clothing and footwear.

The recent downbeat report by the British Retail Consortium is likely to be confirmed when official retail sales statistics for July are due on Thursday. Despite of an increase in sales days the forecasted consensus is that retail sales will decline by 0.5% on the month.

Labour market stats are due out on Wednesday with unemployment in the UK expected to rise again. The claimant count has risen seven times in the last ten months and the trend is estimated to continue.