Daily Insight

The Pound rallied against the majors yesterday, rising from a three month low versus the Dollar, while also registering gains against the Euro following an unexpected surge in U.K producer prices.

The report from the Office of National Statistics showed that UK factories raised prices at the fastest annual pace since records began in 1986, indicating that a sharp increase in the cost of raw materials will stoke inflation.

In the aftermath of the report, Bonds plunged and the Pound rallied as the sharp rise in factor-gate inflation emphasised the recent statement from the BoE Governor, Mervyn King, who said that commodity price gains will push inflation through the government’s 3.0% limit.

The Bank’s Monetary Policy Committee face a difficult balancing act in the months ahead but the quarterly inflation report this morning should provide a further insight into the probability of a June rate cut.

The nine-strong committee left interest rates on hold at 5.0% in May after implementing three quarterly reductions since December. The Pound enjoyed a sharp intraday swing against the Dollar, rising as much as 0.5% by the close of trading last night and the UK currency could extend its run today with consumer prices expected to increase to 2.6% year-on-year in April.

However, a separate report on the UK property market will show that prices fell in March while the BRC retail sales survey is expected to confirm that tighter lending conditions is restricting spending.

The renewed appetite for the Dollar has gathered momentum in recent weeks as the U.S currency rose to the highest level since February against the Pound while appreciating 3.4% versus the Euro following the G-7 meeting in March.

The representatives highlighted the Dollar’s severe decline in value and emphasised their concerns over volatile moves in the currency market. It is surely no coincidence that the Dollar has rallied in the weeks that followed the meeting and for the first time since December 2005, traders are becoming increasingly confident that the Fed will refrain from lowering interest rates in June.

The bullish sentiment surrounding the Dollar is likely to continue despite a host of negative economic data as the focus switches to the retail sales report this afternoon. Rising consumer prices and falling home values has restricted spending with sales expected to show a 0.1% fall in April.

Data Released 13th May

U.K 09:30 BRC Retail Sales (April)

U.K 09:30 DCLG House Prices (March)

U.K 09:30 Consumer Price Index (April)

- Retail Price Index

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

U.S 13:30 Retail Sales (April)

U.S 15:00 Business Inventories (March)