Sterling rips higher on housing and inflation

It is underplaying it to use an expression like ‘storm in a teacup’ for the behemoth $60 trillion Chinese property market’s troubles but there is a good chance it won’t blow up in the way many were fearing a month ago. Many doubt China will allow that to happen because they worry about the contagion effect into other aspects of the Chinese economy and – to a lesser extent – the impact on the Asia/Pacific region. The problem started with new property taxes, so there is a simple solution but ‘backing down’ is not a trait of the Chinese authorities.

Nearer home, UK inflation was stronger than expected at 4.2% on the year. That’s a 10 year high and it should heap pressure on the Bank of England to raise their base rate. We also saw an 11.8% rise on the year in UK house prices according to the Office for National Statistics. Hence traders bought the Pound like hot cakes yesterday. However, this rise may be short-lived because the Bank of England seems pretty confident this is a short-term problem. Nevertheless, the Pound did have a good day, pushing up to test USD 1.35 and looking even more rambunctious against the Euro.

Euro under pressure after weaker inflation

The weaker than expected Eurozone inflation and the troubles on Europe’s Belarus border have combined with Sterling’s strength to push GBPEUR higher. It is up to the lofty height of €1.1920 this morning. That’s 2.5 cents up in a week. The US Dollar is a little weaker too though, so the EURUSD rate is trading sideways around $1.13; some of the lowest levels we have seen since July 2020. That seems like a lifetime ago now doesn’t it?

Sterling’s strength is being seen in other exchange rates too though. GBPAUD shot up to test AUD 1.86 but it lost some ground overnight after fears about China calmed and traders took profit on the rises.

There was a similar spike in the GBPNZD rate but that has almost completely unwound overnight. This pair spiked to NZD 1.9290 before sliding back to NZD 1.9170 at the time of writing. A big rise in inflation expectations in NZ contributed to that. A survey showed Kiwis are expecting inflation to get up to 3.0% and that would pressure the Reserve Bank of New Zealand to try to temper it with higher interest rates.

Central bankers in rate hike timing dilemma

All central banks are fighting the same temptations right now. The dilemma is, raise rates and stifle growth or leave interest rates alone and be accused of ignoring an overheating economy. Central banks are damned if they do and damned if they don’t.

US employment data later

The day ahead brings more comments from central bankers but also the US weekly jobless figures. There are always closely watched as an early indicator of trend changes.

And it is Beaujolais Nouveau Day. The day when the first bottles are released from the latest season in Beaujolais and there is a race to get the first cases back into the UK to be consumed by quaffers who just can’t wait. Personally, I can’t touch the stuff since I had far too much on Beaujolais Nouveau Day many many years ago. I hope your pallet isn’t polluted like mine.

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