Daily Insight

The recent positive sentiment surrounding the Pound continued yesterday as the UK currency rose a further 0.3% against the Dollar and increased to the highest level since March versus the Euro following comments from Mervyn King, the governor of the Bank of England. Prior to the release of the monthly inflation report yesterday, King's comments revived speculation that the medium-term risks to price stability remain a concern to policy makers and a further rise in rates maybe necessary over the coming months. The hawkish tone of his statement was somewhat surprising considering that the UK inflation rate fell to the lowest level in seven months in May according to a report from the Office of National Statistics. The consumer price index, which advanced to a decade high at 3.1% in March, has since fallen to an annual rate of 2.5% in May and suggests that four interest rates increases since August last year are beginning to rein in inflation.

However, the report also shows that the UK annual rate of inflation exceeded the 2.0% target for the thirteenth consecutive month in May as higher earnings and credit growth are becoming entrenched in the economy. In terms of economic data, the Pound may consolidate on the recent gains made against the Euro as average hourly earnings are expected to continue running at 4.5% year-on-year in the first quarter. Euro buyers would be well placed to take advantage of the current rate or at least place a stop order in the market to protect against any adverse market movement. In addition, the Pound continues to trade under the trend resistance at 1.9758 versus the U.S Dollar and therefore buyers of this currency may wish to take advantage as we remain in a downward trend.

The Dollar managed to continue making gains against the Euro yesterday and also remained relatively strong versus the Pound despite the apparent lack of economic indicators released in the States. However, that trend may be reversed this afternoon as a report on U.S consumer spending may show that retail sales rose 0.6% in May as fuel prices reached a record level over the same period. Consumer sentiment has been floundering in recent months following the overwhelming number of subprime mortgage defaults. Nevertheless, strong growth in the labour market combined with higher wage demands are expected to improve consumer spending this year with the pick-up in business investment and factory output expected to sustain the economy in the second half of 2007.

Data Released 13th June

UK 09:30 Claimant Count Unemployment (May)

UK 09:30 Average Hourly Earnings (3 months to April)

U.S 13:30 Retail Sales (May)

U.S 13:30 Import / Export Prices (May)

U.S 15:00 Business Inventories (April)

U.S 19:00 Fed Beige Book Released

written by Adam Solomon