Daily Insight

The Pound has managed to make robust gains against the majors this morning following a hawkish rhetoric from the Governor of the Bank of England, Mervyn King, who has stated that the MPC may need to continue raising interest rates in the short-term. In a speech to business executives in Cardiff last night, King emphasised that the monetary policy committee will be closely studying the risks to price stability and said that if capacity pressures, pricing intentions and inflation expectations remain elevated then the MPC would need to "take further action". Despite the Bank of England's decision to hold interest rates at a six-year high in June, data due this morning is expected to show that UK inflation exceeded the government's 2.0% target for the 13th consecutive month. The headline measure of the consumer price index may show that the annual rate of inflation moderated to 2.6% in May from 2.8% the previous month and may suggest that four interest rate increases since August have begun to cool the economy. The Pound had been in freefall against the Dollar but the speech from the governor of the Bank of England yesterday has managed to shift sentiment and if the report this morning shows that pricing pressures remained unchanged last month, the Pound may continue to make gains.

The recent positive sentiment surrounding the Dollar continued yesterday as the U.S currency rose modestly against both the Pound and the Euro by the close of trading last night. The sharp rise in bond yields last week combined with a number of hawkish statements from the chairman of the Federal Reserve, Ben Bernanke, has pushed the Dollar higher against most major currencies as the threat of a U.S interest rate cut looks less likely. There is a sparse supply of U.S economic indicators released this afternoon with the focus falling on retail sales tomorrow and growth in the manufacturing sector later this week.

The Euro continued to decline against the Dollar yesterday, dropping 0.1% by the close of trading last night and has also come under significant pressure versus the Pound following the distinct lack of economic data released in the Euro-zone. French and Italian industrial production both unexpectedly declined in April as the strength of the Euro threatens to curb export demand. The regional reports yesterday are the latest indication that growth in the European economy, which has expanded at the fastest pace in nearly seven years, has finally peaked. Factory output in both France and Italy dropped 0.8% from March despite initial forecasts of a 0.2% rise in production. The Euro advanced to the highest level on record against the Dollar in April and considering the slowdown in the U.S economy, European based goods are becoming less competitive.

Data Released 12th June

UK 09:30 Global Trade Balance (April)

UK 09:30 Consumer Price Index (May)

- RPI

EU 10:00 Industrial Production (April)

written by Adam Solomon