uk interest rates looking to rise

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The pound has risen sharply against the dollar in recent weeks. The latest data on inflation supported gains, as it became even more likely that UK interest rates will rise this year.
Data on producer prices showed that manufacturers are still coming under pressure from sharp rises in energy and materials costs. But the numbers for February suggests they are increasingly having more success at raising the prices they charge their customers.

Raw materials bills rose at the fastest pace in nine months during April, up 15.7% on the same time last year. But prices charged were also higher, up 2.4% on the same time last year. It’s the fourth month in a row that output prices have gone up.

Money markets are now pricing in another quarter point hike in UK interest rates before the end of the year. Alan Clarke at BNP Paribas expects the Bank of England “to signal that it is moving towards a hike in this week’s Inflation Report,” which is due out tomorrow.

Growing expectations of further rate hikes have pushed the pound to its highest levels in nearly a year against the dollar. The pound now buys more than $1.85, compared to less than $1.75 just a month ago.

But this isn’t just about the pound. The dollar is falling against all the major currencies. A single dollar is now worth less than 112 yen, compared to more than 117 yen last month, and it has fallen 4% against the euro in the same time period. And of course, gold – the ultimate reserve currency – has been hitting fresh 25-year highs on an almost daily basis since the start of the year.
Federal Reserve chief Ben Bernanke sparked the latest dive in the dollar by giving the market the impression that the next US interest rate rise, due on Wednesday, is likely to be the last for a while. A weak report on new jobs for April compounded this view, sending stocks soaring, but driving the dollar down.

But even if the Fed hasn’t finished with rate hikes, it’s going to be tougher to support the currency simply by raising interest rates.

When interest rates are low and stable across the world, currency traders can make apparently easy money by borrowing in low interest-rate currencies and investing in high-rate ones.
But when interest rates start to rise in tandem across the world, this“carry trade” becomes much more dangerous. The exchange rate can suddenly move against unwary investors as markets start to focus more on economic fundamentals – like trade deficits – and less on interest rate differentials

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