The Pound broke below $1.7500 versus the Dollar for the first time since June 2006 yesterday while the UK currency continued its upward move versus the Euro after a survey from the Bank of England showed that UK inflation expectations surged to a new record high of 4.4%.

In addition, the Governor of the BoE, Mervyn King, said the recent depreciation of the Pound may promote a wage spiral and fuel upside inflation risks over the coming months, preventing policy makers from cutting interest rates from the current 5.0%.

Nevertheless, BoE policy maker and staunch dove, David Blanchflower insisted that the Bank must intervene and reduce the benchmark lending rate as he expects labour market conditions to deteriorate further and anticipates the economy to remain subdued for the remainder of the year.

King also said that the Central Bank’s planned money market reforms won’t provide a long-term solution to the credit crisis and insisted that any decision on the matter should rest with the Prime Minister Gordon Brown.

The government announced last week new measures to revive the UK property market and the Bank of England are scheduled to unveil proposals to better cope with a slump in global money markets. However, King’s comments seem to indicate that the Central Bank is distancing themselves from any plan to boost the mortgage market with public funds.

The Pound advanced against the Euro amid concerns that a U.S led global slump will lead to a contraction in European economic growth but the UK currency slumped against a basket of currencies as the focus switches to the minutes from the Bank’s last policy meeting released next week.

The dwindling sentiment surrounding the Euro saw the single currency breach under $1.4000 versus the Dollar, dropping to the lowest level in a year, despite the hawkish statement from the ECB Vice President, Lucas Papademos.

In an interview in Hamburg, Papademos mirrored the recent statement from the Chairman, Jean-Claude Trichet, saying that the economy is likely to avoid a recession while higher energy costs are pushing up wage demands on a broad scale and feeding through to inflation.

The Dollar rallied to a fresh two year high against the Pound yesterday while the U.S currency made robust gains versus the Euro amid further evidence that the economic slowdown has spread to Europe as traders speculate on the probability of German recession later this year.
Data Released 12th September

EU 10:00 Industrial Production (July)

U.S 13:30 Producer Price Index (August)

- Ex Food & Energy

U.S 13:30 Retail Sales (August)

U.S 14:55 Michigan Sentiment (Sept Prelim)

U.S 15:00 Business Inventories (July)

written by Adam Solomon