Wednesday FX Brief: British Pound Screeches Higher on Inflation Projection

Andrew Wilkinson submits: There’s no shortage of individual catalysts to drive foreign exchange prices midweek although the single conclusion is a strengthening of the U.S. dollar to its strongest in three weeks. A series of Odd Couples is behind today’s market action as dealers attempt to pin down the relative strength of domestic units against the dollar.

Finance minister George Osborne tweaked the central bank’s mandate two weeks ago, giving it stronger backing to continue ignoring inflation when it overshoots its target due to one-off factors, reports The Telegraph. But only a handful of economists polled by Reuters last week expect the central bank to add this month to the £375bn of government bonds it bought between March 2009 and October 2012.

THERE are nine people on the Bank of England’s monetary-policy committee (MPC) and many opinions about what should happen to interest rates. The minutes to this month’s MPC meeting, published on February 23rd, revealed a four-way split in the vote on the direction of policy. A majority of five voted to keep the bank’s interest rate at 0.5%. Three members wanted to push up interest rates, including one who voted for an unprecedented half-point increase. Another member thought that policy should be further relaxed through an extra £50 billion of quantitative easing.

Andrew Wilkinson submits: The British pound is proving to be the exception today as dealers’ appetite for anything other than the dollar steps up. The whiff of further quantitative easing is heavy in the air and dealers remain cautious ahead of the release this afternoon of the Fed’s Beige book representing snapshots around the Fed’s 12 regional districts.

Andrew Wilkinson submits: The necessary evil of a Greek default continues to hang overhead like the Sword of Damocles with some wishing for its fall given the prospect of its removal seems less likely. This year’s Sherlock Holmes award goes to EU Monetary Commissioner Olli Rehn who earlier told an OECD forum in Paris that Greece is “the most difficult case” among the three bailout victors.

Andrew Wilkinson submits: The Bank of England today dampened recent speculation that it will meet market demands for any interest rate increase and in the process sent the pound tumbling. A positive session for Asian equities maintained pressures on the Japanese yen, which fell against 12 of its 16 major partners.

I don't know whether Mervyn King is a fan of Edith Piaf. But where monetary policy is concerned, we can say he is not a man burdened by regrets. In a nutshell, the governor of Britain's central bank had this to say last night in Newcastle about Britain's above target inflation and the Bank's response to it.