British pound sterling: Could the worst US drought in decades boost the value of the UK currency?

Details

Published on Thursday, 19 July 2012 08:35

Written by Sam Coventry

International Money Transfers at our sister site

---

 

Gradually this food crisis will be reflected in the cost of the UK food basket and turn the tide against falling inflation.

The pound sterling (Currency:GBP) has found the going tough over the last 48 hours as investors begin to price in yet more monetary easing at the Bank of England. But, could events in the US farmlands come to the aid of sterling? We look at this possibility below.

Firstly, a quick look at the spots:

The pound euro exchange rate is 0.05 pct higher than at Wednesday night's close at 1.2746.



The pound dollar exchange rate is 0.13 pct higher at 1.5673.

The pound Australian dollar exchange rate is 0.31 pct in the red at 1.5052.

As mentioned, investors are concerned that the Bank of England is not yet done with its money-printing programme. Indeed, yesterday's July MPC minutes suggested interest rates could be cut below the already rock-bottom rate of 0.5 pct.

Both interest rate cuts and increasing the supply of money are negative to the pound sterling.

The fact that 7 out of 9 members voted for the latest round of money-printing also attests to the loose mood at the Bank of England.

Adding fuel to their cause is news that UK inflation has fallen yet again. At just 2.4 pct, annual consumer price inflation was slightly more than half the 4.2 pct rate at the end of last year and a shadow of the 5.2 pct peak last September.

Inflation is key to whether any further action is taken at the BoE in the coming months.

But, there are signs that we should be worried about rising inflation, and if it is to rise we could see the pound ultimately gain as the Bank of England is forced to hold back on any further action, and indeed, consider actually rising the interest rate.

The US has witnessed one of the worst droughts in decades - that jet stream that has made the British summer so wet extends to the US where it has actually brought about record-breaking dry conditions.

The results are crop failures.

This morning we see the spot price of soybeans has hit a new record high, and the cost of a bushel of US corn has reached a new high over $8 a bushel.

Corn and wheat prices have jumped by nearly 50% in recent weeks.

Gradually this food crisis will be reflected in the cost of the UK food basket and turn the tide against falling inflation.

It is just a matter of time, as such, I would bet that the Bank of England will struggle to justify further easing action in coming months.