The Pound declined heavily against the majors yesterday, falling by the most in two weeks versus the Euro while also revisiting the support at 1.9500 against the Dollar after UK consumer prices increased beyond expectations in May and fuelled speculation that an increase in rates will stifle economic growth.
The hotly anticipated report from the Office of National Statistics conveyed the message that UK inflation reached the highest level since the Labour Party came to power in 1997 and the Governor of the Bank of England, Mervyn King, will be forced to write a letter of explanation to the Chancellor Alistair Darling.
The Pound snapped two days of gains against the Dollar as the report showed that prices increased 3.3% from this stage last year and King has predicted that inflation will exceed 4% over the coming months, which will curtail the pace of economic growth and push the economy close towards a recession.
The focus this morning will inevitably fall on the release of the minutes from the Bank’s last policy meeting and the voting pattern of the nine-strong committee will be closely watched to determine the chance of a UK interest rate hike in July.
At least one member of the MPC is expected to have voted for a cut in June with David Blanchflower advocating that the risks to economic growth outweigh the current threat of inflation. The tone and language used in the accompanying statement will also be heavily scrutinized but the Pound is unlikely to find any support unless the committee voted unanimously to hold rates this month.
The positive momentum surrounding the Euro and the prospect of an interest rate hike in Europe has seen the single currency rally for a second consecutive day against the Dollar despite reports that investor confidence in Germany fell to the lowest level in over 15-years.
The ZEW Centre for European Economic Research said that its index of investor and analyst expectations fell to the lowest level since December 1992 as rising inflationary concerns weigh on the outlook for the economy while the prospect of a July rate increase may exacerbate the slowdown.
Record high commodity prices, combined with a strong Euro and weakening demand from overseas means that the economy is unlikely to sustain the fastest pace of expansion in seven years as host of recent reports indicates that cracks are beginning to show in the economy with Europe no longer immune to a U.S led global recession.
Nevertheless, the Euro continued to rally against the majors as the market anticipates a series of rate hikes this year following a series of hawkish statements from a number of ECB officials who still view inflation as the single biggest threat to the economy.
The Dollar has struggled to stem the tide against the Euro this week and the U.S currency may continue to decline today as a spate of U.S economic weakness promotes speculation that the Federal Reserve will refrain from increasing borrowing costs this year.
The Dollar recorded widespread losses against the majors yesterday despite oil prices retreating from a record $140 a barrel on Monday but a report on the depleted U.S housing market showed that builders broke ground on the fewest number of new homes for 17-years.
Data Released 18th June
U.K 09:30 BoE MPC Minutes (4/5 June Meeting)
U.K 11:00 CBI Industrial Trends Survey (June)
written by Adam Solomon
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