The recent revival in Sterling sentiment was severely tested yesterday as the UK currency recorded the biggest intraday slide in nearly a month versus the Dollar after a report from the Royal Institution of Chartered Surveyors showed that the slump in house prices exceeded initial expectations.
The RICS housing index showed that the number of estate agents and surveyors reporting falling prices exceeded those reporting gains by 92.9 percentage points in May as the crisis in credit means that mortgage lending has declined to the lowest level in at least thirty years.
A significant drop in home loans means that prices are likely to fall further over the coming months but the Bank of England can’t afford to lower interest rates even as the economy edges closer towards a recession.
The Pound has enjoyed a three-day winning streak against the Dollar since Friday after a report on UK producer prices showed that factory-gate inflation accelerated at the fastest pace since 1986 and may force the Bank of England to raise interest rates.
Tighter lending conditions and falling home values is likely to weigh on consumer sentiment but a separate report from the British Retail Consortium showed that sales still rose 1.9% from this stage in 2007.
Although the Pound slipped versus the Dollar, the UK currency rallied higher against the majority of the 16 most actively traded currencies as the rebound in sales coincided with an unexpected increase in manufacturing output.
However, the Pound may come under some pressure this morning amid a plethora of economic data due for release in the UK with unemployment expected to increase to 2.6% in May but the monthly trade report is forecasted to show that the deficit in goods and services actually shrank in April.
The Euro declined against both the Pound and the Dollar yesterday despite reports in Germany that wholesale prices surged by the most in 26-years last month, indicating that inflation threatens to entrench the economy.
Wholesale prices rose 8.1% year-on-year in May, the highest since 1982, while the report will only serve to increase speculation that the European Central Bank will need to raise interest rates in July while balancing the inherent downside risks to economic growth.
The resurgent U.S Dollar rallied higher against the Pound yesterday and also recorded the biggest two day increase versus the Euro since 2005 as the Chairman of the Federal Reserve, Ben Bernanke, joined the Treasury Secretary in announcing that economic risks have subsided.
The recent spate of hawkish sentiment surrounding the future outlook of the U.S economy has seen traders increase the probability of an interest rate hike while a rebound in economic fundamentals is likely to support the Dollar over the coming months.
Policy makers seem determined to support the Dollar and prevent any further downside momentum after the U.S currency depreciated to a record low against the Euro earlier this year.
In term of economic data, the Dollar stood firm despite reports that the U.S trade deficit unexpectedly widened in April as surging import prices saw the gap in trade grow 7.8% from the previous month.
Data Released 11th June
U.K 00:01 NIESR GDP Estimate (3 months to May)
U.K 09:30 Average Earnings (3 months to May)
U.K 09:30 Claimant Count / Unemployment (May)
U.K 09:30 Trade Balance (April)
U.S 19:00 Federal Budget (May)
U.S 19:00 Fed Beige Book Released
Related posts:
- The Dollar rallies against the majors following a hawkish statement from the Chairman of the Federal Reserve, Ben Bernanke
- The Dollar declines against the majors as Bernanke stops short of admitting that the U.S economy is in a recession
- The Pound continues to make gains as the BoE expresses concerns on the upside risks to inflation
- The Euro rallies after economic growth in Germany accelerates at the fastest pace in 12-years
- The Dollar continues to decline against the majors despite a host of positive economic reports
