The Pound rallied higher against the majors on Monday, rising towards 1.2600 versus the Euro by the close of trading while also consolidating above 1.9700 against the U.S Dollar after a report from the Office of National Statistics showed that UK producer prices increased at the fastest pace in at least twenty years last month.
The index provides a measure of factory-gate inflation and indicated that record high commodity prices will force manufacturers to pass on higher costs to the consumer, while the Pound rallied on speculation that the Bank of England will refrain from cutting interest rates even as the economy heads towards a recession.
Prices charged by factories actually increased 1.6% in April, the most since records began in 1986 and more than double initial forecasts. The slump in housing and consumer confidence is hurting economic growth but the Bank of England are clearly more focused on the upside risks to price stability after keeping the key interest rate unchanged at 5.0% last week.
The Bank’s reluctance to intervene means that UK interest rates are likely to remain on hold for the time being and are still the highest among the highest of the Group of Seven industrialised nations.
However, policy makers have also said that the pace of UK economic growth will slow to 1.0% in the revised estimate for the first quarter, the least since the months that followed the last recession 17-years ago.
The short-term revival in Sterling sentiment will be severely tested on Tuesday as a report from the British Retail Consortium will confirm a further decline in sales while UK industrial production probably contracted in April.
The Euro declined against both the Pound and the Dollar yesterday despite reports that exports in Germany rose beyond initial forecasts in April.
Sales abroad increased 1.2% from the previous month and the report provides some optimism that healthy overseas demand will help companies cope with the rising cost of energy prices.
The recent statement from the Chairman of the European Central Bank, Jean-Claude Trichet, indicated that policy makers are still pre-occupied with countering rising inflationary pressures despite news from Bundesbank last week that the economy is losing momentum.
The Dollar made significant gains against the Euro yesterday, rising from the lowest level in six weeks, after policy makers emphasised their concerns over the Dollar’s 7% depreciation in value this year.
A statement from the U.S Treasury Secretary, Henry Paulson, showed that policy makers were becoming increasingly concerned with volatile fluctuations in the currency market while the Fed may intervene if the Dollar slide continues.
The familiar tone of Paulson’s comments coincided with a separate statement from the Federal Reserve Bank of New York President, Timothy Geithner, said that the Reserve Bank is monitoring the Dollar closely.
Data Released 10th June
U.K 00:01 BRC Retail Sales (May)
U.K 09:30 DCLG House Prices (April)
U.K 09:30 Industrial Production (April)
- Manufacturing Production
U.S 13:30 Trade Balance (April)
CAN 14:00 BoC Rate Announcement
written by Adam Solomon
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