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The pound rose to briefly touch 1.19 against the euro

The Pound, Sterling

The pound rose to briefly touch 1.19 against the euro on Monday afternoon for the first time since 20 January after speculation mounted over the weekend that the Bank of England’s Monetary Policy Committee (MPC), who meet later on this week, may be on the verge of a sooner-than-expected increase in UK interest rates to combat rising inflation levels. Both the CPI (the measure favoured by the government) and RPI indices have now exceeded government set inflation targets for the last 10 months in a row in the UK, largely down to ever increasing commodity and energy prices.
Some analysts are pointing to last week’s data which showed a better-than-expected performance from the manufacturing, construction and services sectors of the UK economy in January to suggest that the economic recovery in the UK may be sufficiently robust to withstand the first increase in borrowing costs in the UK since 2007.

The British Chambers of Commerce disagree and have urged the MPC to keep its key interest rate on hold this week as the UK recovery remains “fragile,” in their opinion.

All 62 economists in a Bloomberg News survey forecast the bank to leave the key rate at a record low of 0.5% this week. It will also maintain its bond purchase program, commonly known as Quantitative Easing (QE) at £200 billion according to another survey.

The Institute of Directors (IoD) has called on the government to reduce taxes and scrap collective bargaining for teachers and NHS workers. It has put forward a series of proposals it says will cost the government next to nothing but help secure economic growth. Proposals include the scrapping of the 50% top rate of income tax and a reduction in corporation tax from 24% to 20%.

Ernst and Young’s Item club also predicts good things for the country’s exporters, fuelled by growth in the middle classes in emerging countries like Brazil, Russia, India and China (BRIC). Just 5% of British exports currently find their way to BRIC nations, but ITEM forecasts annual growth of almost 12% until 2020.

Continuing the ‘mixed bag’ theme of recent UK data, analyst BDO reported that High Street sales were buoyant in January, easing fears that the VAT rise and worries over the government’s austerity program will hit consumer sentiment. Sales during January were up by 9.1% from January 2010. Despite the strong figures reported by BDO, recent updates from retailers have not been encouraging.

The Euro

Sovereign debt issues will remain very much to the fore for the euro after EU leaders met on Friday to discuss an overhaul of the euro zone’s €440 billion bailout fund and set a deadline of 25 March to come up with what the German chancellor called a “comprehensive” package to address the crisis. The measures may include stiffer sanctions against budget deficits higher than 3% of GDP, lower interest rates on loans and allowing the European Financial Stability Fund (EFSF) to buy debt directly from member states.

Euro skeptics remain unconvinced and are pointing to a Bloomberg survey which showed investors predicting that at least one nation will leave the euro within five years and that Greece and Ireland will default. Euro optimists, on the other hand, are increasing wagers that the euro will rise to the highest level since October as German Chancellor Merkel said at the end of last week’s meeting that there was “broad consensus” on reaching an accord to boost competitiveness, including debt-limitation rules.

The euro nevertheless fell to a two week low against the dollar yesterday but later recovered to end the session little changed after weaker-than-expected German factory orders. The results sparked jitters about the economic recovery and poured cold water on expectations of an interest rate increase in the euro zone any time soon. German factory orders fell 3.4% in December after rising 5.2% in November. Economists had predicted a fall of around 1.5%.

Meanwhile debt ratings agency Moody’s issued a downbeat report on Italian banks. The agency said it would maintain its negative outlook on the sector until Italian banks address the issues of asset quality and capital adequacy.

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