Currency traders make a 180-degree turn
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Your support makes all the difference.Oops! The currency markets have decided they were wrong about UK interest rates going up and German ones staying unchanged. Traders have now herded towards the opposite view - that German rates will rise before long while the Bank of England's Monetary Policy Committee will wisely sit on its hands.
Is this 180-degree turn in sentiment justified? Take the German side of the DM-sterling exchange rate first. The game being played by the Bundesbank is to convince the markets that it will raise the cost of borrowing if it has to - without actually doing so. Higher German interest rates would infuriate politicians, exasperate potential EMU partners and clobber an economic recovery still in its early stages. Stabilising the mark is the priority here. The Bundesbank would prefer not to do anything stronger.
As for the UK, the shift in sentiment rests on three surveys of the high street during a summer when many more Britons than usual were taking a windfall-financed break in foreign parts, and on one underwhelming set of inflation figures. But actually there is not yet any firm evidence that the economy is slowing enough to keep the brakes on inflation.
If this fails to materialise by December, the forex herd could easily stampede back to its original views. There is absolutely no prospect of an interest rate rise at the end of today's two-day meeting of the Monetary Policy Committee. But later in the year? Who knows. The inflationary pressures building up in the economy may prove stronger than suspected.
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