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MPC Minutes Hurt Sterling

- One MPC member voted for a rate cut
- FOMC prepares for lower Dollar interest rates

Good morning. After all that has been said by the Bank of England - both orally and in print - during the last few weeks, investors should have picked up on the idea that MPC members see inflation coming lower. Several official and individual pronouncements have referred to CPI inflation moving back towards its 2 per cent target; some have even spoken of an undershoot next year. But whilst the market was mentally positioned for the MPC’s decision earlier this month it was not prepared for the news that the stray dissenting vote was for a cut rather than for an increase. Add to that a softening of the language and a picture is painted of an MPC leaning towards lower, not higher interest rates. Tuesday’s surprise increase in inflation will have pre-empted the worst effects of the MPC minutes and any suggestion that the MPC really won’t raise the Bank Rate again must be taken with a pinch of salt. Nevertheless, investors’ enthusiasm for the Pound was dented by the minutes. Not only did it allow the Pound to slip against the Euro, it also took it lower against fellow members of the high-yielders club.

Although it moved generally lower on the day the Pound is marginally firmer against the US Dollar this morning. The Dollar was itself hit by an interest rate decision and by the statement from the Federal Open Market Committee. Like the MPC, the FOMC was expected to leave the funds rate unchanged at 5.25 per cent and it duly did just that. But, like the Pound, the Dollar lost a little more of its interest rate street cred as a result of the wording of the statement. The reference to “additional firming”, which had been a constant feature of FOMC statements, was dropped. The change was seen as a signal that the FOMC is preparing for a rate cut.

Sterling and the Dollar both have work to do. Sterling will have the opportunity to shine this morning with February’s official retail sales figures and the CBI’s latest Industrial Trends survey. Other than the weekly jobless numbers the Dollar will have no data to help it. It will have to rely instead on speeches by four senior Fed people and it is difficult to imagine what they might say to persuade investors that a rate cut is not in the offing. Given decent figures, the Pound should therefore be able to edge higher. Its performance against the Euro will be complicated by a couple of Euro zone ecostats this morning for industrial new orders and the trade balance.

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