Currencies

Wednesday June 18, 12:42 PM
Forex - Pound softens as BoE minutes muddle rate outlook

LONDON (Thomson Financial) - The pound softened somewhat after the publication of the minutes to the Bank of England's last policy meeting showed little coherence among UK rate-setters over what to do with monetary policy.

The minutes showed both a rate hike and a cut were discussed, with one vote for a cut and the majority voting for unchanged rates. The result raises the likelihood that the next meeting will be a three-way split, making the outlook for interest rates particularly unpredictable.

'While the BoE appears to have no clear commitment on the next move in the Bank rate, inflation concerns suggest that, if the Bank were to move in the next few months, it would probably be a hike,' said Matthew Sharratt at Bank of America (NYSE: IKJ - news) .

However, this would go against the mood of comments by BoE governor Mervyn King in his letter to the Treasury on Tuesday, where he said it would not be prudent to raise rates at a time when the economy was slowing so sharply.

Markets have turned pessimistic on the pound's future, as the longer inflation keeps the BoE from cutting rates, the deeper the economic downturn will be. Conversely, any rate hike could be one blow too many for an ailing economy.

Hans Redeker at BNP Paribas (Paris: FR0000131104 - news) noted how the pound fell on Tuesday after CPI (NYSE: CPY - news) inflation came in above expectations, suggesting the relationship between inflation and currencies is breaking down.

'In the midst of the slowing economic activity, the market interpreted the deteriorating UK inflation outlook as one that was negative for pound assets,' he said.

More mixed economic news came today from the Confederation of British Industry's survey of manufacturing activity, which showed a surprise increase in new orders, although prices remained near their 13-year high.

The euro, meanwhile, has fallen to daily lows against the dollar as a lack of economic data on either side of the Atlantic has left trading sensitive to technical flows.

The European Central Bank is widely expected to increase interest rates next month, although policymakers are now trying to rein in expectations of a series of hikes.

U.S. policymakers have similarly suggested rates may need to raised, although reports this week have suggested the Federal Reserve remains more concerned with lower growth than price pressures.

London 1125 GMT London 0810 GMT

U.S. dollar

yen 108.23 up from yen 108.20

Swiss franc 1.0449 up from Swiss franc 1.0433

Euro

U.S. dollar 1.5477 down from U.S. dollar 1.5506

yen 167.51 down from yen 167.77

Swiss franc 1.6172 down from Swiss franc 1.6177

pound 0.7938 down from pound 0.7945

Pound

U.S. dollar 1.9498 down from U.S. dollar 1.9516

yen 210.98 down from yen 211.20