The British pound is believed to weaken opposite the Euro today as inflation in the UK is
estimated to have remained at a relatively high level in December, suggesting
that the squeeze on household incomes continue to be painfully tough. Meanwhile,
signs of stabilization continue to buoy the Euro after ratings agency Standard
& Poor’s raised its outlook on both Luxembourg and Finland earlier.
The UK Office for National Statistics is awaited to report that steep rises in energy
bills kept inflation high in December. Economists project that the Consumer Price
Index remained at 2.7 percent for the third month in a row, after a series of
energy companies pushed up prices at the end of the year. Five large energy
companies introduced price rises in December, hitting some 25 Million
households. Price pressures are said to have been partially offset by lower
fuel and food costs, but analysts say that inflation is likely to rise in the
coming months as poor harvests around the world due to extreme weather are apt
to lift food prices anew.
Rising inflation threatens to deflate the government’s recovery hopes by eroding
consumers’ disposable incomes. Recent data from the ONS revealed that average
earnings rose by just 1.3 percent in October, failing to keep up with elevated
price pressures. The government is gambling on an improvement in spending to
lift the economy this year. It estimates that household consumption should
account for 0.5 percent of the forecast 1.2 percent growth, but recent updates
from retailers suggest that spending was fairly underwhelming in the Christmas
period, solidifying views that the economy shrunk again in the fourth quarter.
In fact, NIESR has already forecast that GDP contracted by 0.3 percent in the
December quarter. In related matters, BOE Governor Mervyn King is due to
testify before the Parliament’s Treasury Select Committee in London today.
Should he express a downbeat tone on the economy, the Pound is apt to decline
on views that the central bank is still considering expanding monetary stimulus
in the coming months.
Meanwhile, the S&P upgraded its outlook on the top-grade credit rating of Luxembourg
and Finland from negative to stable, suggesting that the threat of a downgrade
has eased. The agency cited strong financial and political frameworks in both
nations as reasons to retain their prized credit ratings. On optimism that the
Euro Zone has made considerable progress in its crisis-fighting measures, the
single currency is apt to rise today, warranting a long position for the
EUR/GBP.
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