The Pound struggled to remain above the crucial $2.00 level for a second consecutive day against the Dollar while the UK currency also retreated back towards 1.2600 versus the Euro last night amid contradictory comments from the Bank of England.
Consumer prices rose above preliminary forecasts in June and to the highest level in over a decade but MPC member, Dale, said in an interview yesterday that a slowing economy would help rein in inflation.
In a separate statement, BoE policy maker Andrew Sentence said that he was “particularly struck” by the jump in prices and even considered voting for an increase in UK interest rates last month.
The nine member monetary policy committee face a difficult balancing act in the months ahead as record high food and fuel costs stoke price expectations while policy makers attempt to shield the economy from a recession.
The minutes from the Bank’s last policy meeting are released next week and although rates were left unchanged at 5.0% this month, the voting pattern of the committee will be of particular interest on the future outlook for policy.
The Euro remained largely unchanged against the majors yesterday as a hawkish rhetoric from the ECB President, Jean-Claude Trichet, prevented the single from succumbing to a recovery in Dollar sentiment.
The Chairman of the Central Bank maintained his hawkish stance on monetary policy despite the escalating fears of a worldwide recession and said that policy makers can’t afford to ignore the second round effects of higher inflation.
In short, Trichet acknowledges the risks to economic growth but strongly believes that maintaining the risks to price stability is a far more pressing concern and is determined to bring inflation back from the highest level in over 16-years.
The ECB elected to raise interest to 4.25% earlier this month and the tone of yesterday’s statement could mean that further increases are to come while the Euro may find further support this morning as German producer prices are expected to show that a measure of inflation accelerated to 6.5% year-on-year in June.
The renewed optimism surrounding the Dollar is hardly surprising given that oil prices have retreated close to $18 a barrel or 12% since Monday’s high of $147.67, helping lift U.S stocks which had previously plummeted towards a record low.
The escalating tensions in the Middle East raised concerns over supply and helped push energy prices to new record highs but a surprising increase in U.S inventories has prompted speculation that oil may have peaked.
Lower prices would enhance consumer sentiment and improve business confidence while also helping alleviate the already persistent inflationary concerns and investors are optimistic that prices have topped as the fall this week is in line with the degree of the prior corrections.
In terms of economic data, the Dollar remained little changed after U.S housing starts, building permits and weekly jobless claims were all better than expected by manufacturing the Philadelphia region failed to rebound in June.
Data Released 18th July
U.K 09:30 PSNCR (June)
GER 07:00 Producer Price Index (June)
EU 10:00 External Trade Balance (May)
written by Adam Solomon
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