The Pound rallied against both the Dollar and the Euro yesterday amid speculation that UK inflation will exceed the Bank of England’s target in May and consumer prices may edge above 3.0% for a second month in a row.
The UK currency staged a strong intraday move against the Dollar, rising to a high of 1.9685 during the European session, while the Pound also peaked above 1.2700 versus the Euro as the possibility of a UK interest rate hike improves by the day.
The release of the UK consumer price index this morning has promoted speculation that the Bank of England will keep interest rates on hold for the remainder of the year in an attempt to tame inflation.
The report is expected to show that prices reached 3.2% year-on-year in May and a reading of 3.1% or higher would force the Governor of the Bank of England, Mervyn King, to write of letter of explanation to the Chancellor Alistair Darling.
The last letter was published in April 2007 and given that oil prices continue to climb, reaching a high of $140 a barrel yesterday, the subsequent impact on inflation will probably see prices rise towards 4.0% over the coming months.
The short-term momentum surrounding the Pound means that Euro and Dollar buyers would be well placed to take advantage of the current rate or at least place a stop order in the market to protect against an adverse reaction to the CPI numbers.
The Euro staged a modest rebound against the Dollar yesterday, rising as much as 0.7% by the close of trading last night after an EU report showed that inflation in the Euro-zone accelerated at the fastest pace in 16-years and exceeded initial forecasts last month.
The harmonised index of consumer prices showed that inflation soared to 3.7% year-on-year in May, the highest level since June 1992, as food and energy costs continue to rocket higher and pose a “more complicated” dilemma for the ECB.
Officials from the Group of Eight nations said yesterday in a meeting in Japan that rising commodity prices are posing a serious challenge to economic growth and the ECB President, Trichet, responded by indicating that policy makers could raise interest rates in July.
Nevertheless, the Euro failed to hold firm against the Pound and the single currency may struggle to make gains this morning as the focus switches to the ZEW index for investor confidence in Germany.
The Dollar endured a torrid day against the majors yesterday as a combination of weakening domestic demand and rising oil prices saw the U.S currency plunge 1.1% against the Pound and fall by the most in over a week versus the Euro.
The Empire state manufacturing index showed that activity in the New York region contracted by more than expected this month following a sharp downturn in consumer spending and business investment.
The dramatic slump in housing and home construction shows few signs of slowing while sales of U.S autos have fallen to the lowest level in 15 years, which is hurting U.S factories and threatening to cause more job cuts.
Data Released 17th May
U.K 09:30 Consumer Price Index (May)
- Retail Price Index
GER 10:00 ZEW Index (June)
EU 10:00 Foreign Trade (April)
U.S 13:30 Housing Starts (May)
- Permits
U.S 13:30 Producer Price Index (May)
– Ex Food & Energy
U.S 13:30 Current Account (Q1)
U.S 14:15 Industrial Production (May)
– Capacity Utilisation
written by Adam Solomon
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