An Inflation Battle – The GBP/USD Could Present Volatility

Inflation data from the U.S and England, together with an interest rate decision should provide market participants with enough volatility this week, especially as recent government efforts are now expected by some to lead to higher inflation levels in the near future. Since the start of the economic crisis, central banks have battled the economic downfall, injecting vast amounts of money into the financial system using monetary tools and quantitative easing methods.

According to recent statements “economic conditions including low rates of resource utilization, subdued inflation trends, and stable inflation expectations are likely to warrant exceptionally low levels of the federal funds rate for an extended period”
While low rates could provide stability to the economic system, they could also lead to higher prices as more money chases after few goods. Other banks such as the RBA have already foreseen the possible problems and are now using exit strategies to withdraw funds from their economy. According to recent data, U.S retail sales jumped by 1.4% led by a 7.4% surge in spending on motor vehicles and parts.

This week an inflation battle could take place, as the U.K and the U.S are both expected to release their numbers. In addition, the U.S’s inflation numbers could once again dictate to the Fed its future monetary methods, especially if the numbers come out higher than expected. According to economists the U.S figures are expected to come out higher than expected, while the U.K numbers are expected to show a minor drop. Expectations are illustrated on the chart below.

http://www.dodjit.com/CmsItems/image...infografic.jpg

Furthermore should the U.S results show an increase in prices, the Fed might have no other alternative than to change its stance. While we believe the fed will hold this time round at a low of 0.25%, Bernanke could use his famous verbal tools to contain inflation expectations, commenting on future exiting strategies.

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Hi there,

The United Kingdom’s Finance Minister, Alistair Darling indicated that he will probably raise the estimate of borrowing by the government from a record 175 Billion Pounds, admitting that the recession has been deeper and required more intervention than he initially thought back in April.

The fear is that an increase in public borrowing might cause England to lose its triple-A rating if the country does not act to repair the state of its finances soon.

The fears on Wednesday were backed up by the downgrade of Greek sovereign debt a day earlier as well as the warning that Moody’s, the largest rater of corporate and government debt, gave to the US and UK regarding their spending and borrowing.

At 11:00PM GMT, the Pound Sterling was trading down .3% against the US Dollar to 1.6236, down .42% versus the Euro to .9063, down .37% to the Swiss Franc to 1.6664, down .98% against the Japanese Yen to 142.57, down .76% to the Australian Dollar to 1.788 and against the Canadian Dollar, down .58% to 1.7224.