Following on from last week, the Pound rocketed higher against the Dollar on Friday, rising to a high of 1.7993 by the close of trading while the UK currency also made gains versus a basket of currencies as the overextended decline in the pair finally started to correct.

However, the downside risks surrounding the outlook for the UK economy means that the Pound may be unable to sustain its surprising upside momentum against the Dollar amid a packed week of economic data.

The focus this week will fall on the UK consumer price index and the latest numbers are forecasted to accelerate even faster to 4.6% year-on-year in August to mark the steepest increase since May 1992.

Elsewhere, the Bank of England release the minutes of the August meeting on Wednesday and the outcome of the vote could potentially be a huge market mover for the Pound as policy makers are expected to be split on the decision to hold rates while the focus will shift to the tone of the accompanying statement.

The projected increase in consumer prices means that the Governor of the BoE, Mervyn King, will have to write yet another letter of explanation to the Chancellor but it also poses a difficult dilemma to policy makers as they attempt to balance the downside risks to growth against persistently high inflation.

The Pound may also come under renewed pressure against the majors as UK retail sales are expected to fall 0.5% last month, bringing the annual rate to a two year low of 1.6% and the tone of the report is adding to the plethora of evidence indicating that the economy is heading for a recession.

The Euro slumped to a 1-year low against the Dollar last week but the single currency bounced back on Friday after European Central Bank member Axel Weber said that the outlook for inflation has improved as oil prices retreat to a six month low.

At a meeting of European finance officials in Nice, Weber told reporters that the Central is more confident now than ever a few weeks ago and that “ recent developments have contributed towards meeting our objective” of ensuring price stability.

Oil prices have retreated from a record high of $147.27 in July but they are still up more than 26% over the past year and that is restricting consumer and business spending while the ECB have emphasised concerns over second round inflation risks as rising prices encourage workers to seek higher wages.

The Euro rallied 1.6% against the Dollar on Friday as the oversold currency finally reversed and was helped by worse than expected report on U.S retail sales while speculation over an ECB rate cut may prevent the Euro from extending its current run into this week.

The Dollar fell sharply across the board on Friday as the advanced estimate for retail sales fell more than expected in August to signal the second consecutive month of contraction and the broadly bearish tone of the report dismisses suggestions that the Federal Reserve will be in a position to raise interest rates before year end.

The focus this week will fall on the FOMC rate decision on Tuesday and the general consensus is that policy makers will keep interest rates unchanged at 2.0% but traders will look to the accompanying statement to assess the potential for a change in policy over the coming months.

Data Released 15th September

EU 10:00 Labour Cost (Q2)

U.S 13:30 Empire State Index (September)
U.S 14:15 Industrial Production (August)
- Capacity Utilisation

written by Adam Solomon