The Pound enjoyed a strong rally against the majors last week, rising to a high of 1.9755 versus the U.S Dollar, after UK retail sales increased by the most in 22-years last month and reinforced speculation that the Bank of England could raise interest rates to combat inflation.
However, the Pound failed to hold on to last week’s gains yesterday after a report from Rightmove Plc showed that UK house prices plunged by the most this year in June, dropping 1.2% from the previous month to an average price of £239,564.
Tighter lending conditions combined with higher mortgage rates means that fewer people are able to buy while a separate from HBOS Plc predicted last week that prices will fall by as much as 9% in 2008.
Sterling sentiment was further undermined after the Deputy Governor of the Bank of England, John Gieve, concurred with the lender and said that a further decline in house prices will weigh on consumer confidence and dent the prospects of an economic recovery.
Gieve is a member of the BoE’s monetary policy committee who forecast last month that economic growth would slow to the weakest pace since 1992 later this year.
However, consumer prices are expected to breach 4.0% over the coming months and the Bank may have little option but to raise borrowing costs from the current 5.0%.
The Euro declined against the Dollar yesterday and largely failed to capitalise on broad Sterling weakness after the Ifo index of business confidence in Germany showed that sentiment fell this month to the lowest level since 2005.
A separate report from the Royal Bank of Scotland showed that Europe’s manufacturing and service industries unexpectedly contracted this month and reduced speculation that the ECB will raise interest rates in July.
The index of sentiment slumped to a reading of 49.5, the lowest level in five years and the reports combined provide an indication that an increase in borrowing costs would hurt economic growth.
The recent hawkish rhetoric from a number of ECB officials combined with the recent upturn in consumer prices has seen the market factor in a good chance of a quarter-point hike in July.
However, the Euro declined against the Dollar as the reports also signal that the Central will face the same problems as the BoE in balancing to the downside risks to growth against rising inflationary pressures.
The tentative price action surrounding the Dollar suggests the market’s gave is fixed towards the FOMC interest rate decision on Wednesday evening while the oil summit in Jeddah this weekend will attract particular interest. The Dollar may find some support amid hopes that Saudi Arabia will drive down the price of oil with news on increased production.
However, the prior announcement on supply failed to make any groundbreaking impact on prices while the most important members of OPEC will be absent from the meeting altogether.
The Dollar may find some support in the build up to the FOMC announcement tomorrow and after the Fed cut rates by 325 basis point over an aggressive period of monetary easing, the Reserve Bank are expected to pause this month.
The accompanying statement may also be hawkish in tone given that some policy makers have been talking up the rising inflationary concerns, which could signal a possible increase before the end of the year.
In terms of economic data, the Dollar could make further gains against the majors this afternoon as a government report is expected to show that U.S consumer spending rose by the most in six months as confidence improved despite the escalating price of fuel.
Data Released 24th June
U.S 14:00 Case / Shiller House Prices (April)
U.S 15:00 Consumer Confidence (June)
written by Adam Solomon
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