22 June 2006, 17:25  Pound slips following Walton death

The pound was on the backfoot on the news that David Walton, the only member of the Bank of England's rate-setting body to vote for a rate hike in the last two months, has died. The minutes to the June 8 meeting of the MPC, published yesterday, showed that Walton was once again the only dissenting voice on the eight-member panel voting for a quarter-point hike in the repo rate to 4.75 pct. As a result, news of Walton's death sent UK gilts higher and put the pound on the backfoot. "Walton had been the lone MPC member voting for a hike at the last two meetings, and short sterling implieds have moved lower by about 4 basis points in reaction while the euro moved higher against the pound," said Daniel Katzive, currency strategist at UBS. Walton's death leaves the MPC short of two members as Chancellor of the Exchequer Gordon Brown has yet to appoint a successor to Richard Lambert, who left the MPC earlier this year to become director-general of the Confederation of British Industry. The MPC's next rate setting vote is on July 6. It will be the first time since a brief period in 1997 when the MPC was first set up, that only the rate-setting committee has been reduced to seven. Under the legislation that set up the MPC, the MPC cannot operate without at least six members. Elsewhere, the dollar garnered support across the board as emerging market currencies and commodities suffered a renewed bout of selling. Ian Stannard, currency strategist at BNP Paribas, said the catalyst to the dollar's move higher was the slide in the New Zealand dollar overnight. That fell sharply on the news that New Zealand annual current account deficit equated to 9.3 pct of the country's GDP, the worst result since 1975. New Zealand's woes sparked a flight out of other emerging market currencies and commodities, helping the US dollar in its capacity as a safe haven. Earlier, the euro had been supported by comments yesterday from the European Central Bank's president, that reinforced expectations of further interest rate hikes to come. Analysts said Jean-Claude Trichet's comments to the European Parliament stoked growing concerns about the emerging inflationary threat in the 12 nation single currency zone. He noted the rise in the HICP inflation measure to 2.5 pct in May and his belief that it will remain elevated over the coming months. His comments shifted the market's attention back to what the ECB will do in the coming months from the outlook for US borrowing costs. Analysts said the data flow out of the euro zone is likely to support higher rate forecasts. Though mounting European rate expectations are helping to support the euro, analysts cautioned that the single currency will find it difficult to break through the 1.2680/1.2700 usd resistance, given the uncertainty surrounding the outlook for US borrowing costs. Though another rate hike from the US Federal Reserve has been factored in, there is still some uncertainty about whether another one will be in the offing in August. Analysts said the market is looking for direction from the statement accompanying the expected Fed hike in the funds rate to 5.25 pct on June 29. The acceleration in core inflation measures in the US has been the main factor why the market is now predicting a greater than 60 pct chance of two more quarter-point rate hikes from the Fed. The spike up in US rate expectations has helped support the dollar in recent weeks because it occurred at a time when short-term yield considerations were moving in favour of the euro and the yen, with both the European Central Bank and the Bank of Japan expected to tighten policy over the coming months.

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