Inflation likely to remain close to zero

Paresh Davdra is the Dealing Director of RationalFX, Currency Specialists. Tuesday 17th March 2015 19:48 EDT

Prime Minister Alexis Tsipras again tried to reassure Euro-zone partners that Greece would stick to an extended bailout agreement with its international creditors even as a war of words rumbled on between Athens and Berlin. Tsipras used a visit to the Paris-based Organisation for Economic Cooperation and Development to make his case for a long-term restructuring of Greece's debt while promising to implement agreed reforms.

Greece successfully sold €1.3bn of Treasury bills, covering the amount it needed to refinance a maturing issue. The issue was more costly for the government however, with the paper sold at a yield of 2.7%, up from the 2.5% yield at a previous sale in February.

In Germany the BGA trade association raised its forecast for exports, expecting the weaker euro to offset uncertainty surrounding crises in Greece and Ukraine. It said it expected exports to grow 4.5% this year, up from a previous forecast of 4%. Imports are forecast to rise 4% which would increase Germany's trade surplus to a record €231bn, BGA said
In the UK Bank of England Governor Mark Carney spoke in the House of Lords. He stated that Inflation is likely to remain close to zero for much of 2015. Carney also mentioned that Most of the falls in CPI were due to weakness in commodity prices such as oil. He also stated that he sees UK output growth remaining solid and increasing signs that wages are picking up. A Gentle rise in interest rates is likely and consistent with mandate. Finally Carney said that the medium term risk to financial stability remains from the housing market.

The pound climbed for a seventh day against the euro, reaching its strongest level in more than seven years.  Bank of England member Martin Weale also spoke, stating he sees a risk of a sharp fall in sterling because of the country’s large balance of payments deficit. Britain’s current account deficit was equivalent to 6% of GDP in the third quarter of last year, matching the biggest deficit on record.

British construction output unexpectedly fell in January at the sharpest monthly rate since late 2013, dragged down by a worsening decline in house building. Construction output shrank by 2.6 percent in January after rising by 0.6 percent in December, the Office for National Statistics said. Total new house building dropped by 5.0 percent on the month, the steepest fall since February last year. While most signs points to a strong start to the year for Britain's economy, construction output has disappointed.

The pound hit its lowest level against the dollar in 20 months, amid growing expectations that US interest rates will rise in coming months. The dollar has gained more than 10% against a basket of six major currencies so far this year, led by its rise against the euro. This puts it on track for its best quarterly performance since 1992.

The Dollar strengthened after the number of Americans filing for unemployment benefits declined more than forecast, returning to a level that’s consistent with an improving labour market. The slump in claims indicates the elevated readings in previous weeks were probably due to companies temporarily dismissing workers because of inclement winter weather, rather than underlying weakness in the labour market in another great sign for the US economy.

Consumer confidence declined in March to a four-month low as optimism about the U.S. economy was tempered by weaker income expectations and a rebound in gasoline prices. The University of Michigan said its preliminary consumer sentiment index decreased to 91.2 this month from 95.4 in February.  Consumers were less upbeat this month as cold weather boosted utility bills, the cost of gas climbed from the almost six-year low in January and wage growth was limited among middle- and lower-income households. At the same time, a better job market is among reasons Americans may feel comfortable sustaining a steady pace of spending.

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