Daily Insight

Following on from last week, the renewed appetite for the Pound saw the UK currency bounce back from an intraday low of 1.9363 versus the Dollar following the release of the Bank of England's quarterly inflation report.

The tone and language used by the Governor, Mervyn King, showed the policy makers are more concerned with the outlook of inflation rather than the diminishing prospects for economic growth.

The statement followed earlier reports on UK producer and consumer prices, which showed that the annual pace of inflation breached the government's 3.0% limit in April.

The overwhelming rise in raw material costs combined with the sharp increase in food and energy prices means that manufacturers have little choice but to pass on higher costs to the consumer.

The Bank's quarterly inflation report has all but ended the speculation surrounding a June rate cut and the Pound has rallied against the majors despite separate reports that the UK labour market deteriorated for the fourth straight month in April.

The focus this week will fall on the minutes from the Central Bank's last policy meeting where the market will be looking for any fresh indication on monetary policy while the retail sales report may undermine Sterling sentiment and emphasise the gloomy outlook for the economy.

The Euro took advantage of broad Dollar weakness and staged a strong rally against it's U.S counterpart while also recording modest gains versus the Pound despite reports that the European trade balance swung into a deficit in March.

A strong Euro is weighing heavily on Euro-zone exports and weakening demand from overseas is likely continue over the coming months with the economy expected to slow to just under 2.0%.
A number of ECB officials have continued to express their discontent over the current level of inflation with Liberscher indicating that prices rising above 3.0% are unacceptable.

The staunchly hawkish stance of many ECB policy makers combined with the resilience of the German economy may mean that the Central Bank will refrain from cutting interest rates this year and the Euro may continue to make gains amid a packed week of Euro-zone economic data.
The recent revival in Dollar sentiment was severely tested on Friday as the U.S currency fell by the most against the Euro since mid March following a bigger-than-expected drop in the Michigan sentiment survey.

The report showed that consumer confidence in the region had dwindled while record high oil prices raised concerns that the U.S economy will stall. The Dollar declined against the Euro and also bounced off the yearly low at 1.9366 versus the Pound amid fears that the crisis in credit is far from over.