Yesterday, the Pound made further gains against the Dollar and the Euro following the release of the monthly house price survey from the Royal Institution of Chartered Surveyors, which showed that prices had increased dramatically in May and the increase to 20 represented the single biggest rise in over 2 years. House prices account for 60% of UK wealth and have risen consistently almost every month since the Bank of England reduced interest rates to 4.50%, which perhaps gives a little insight as to why the BoE are hesitant in adjusting monetary policy to counter the threat of higher inflation. In addition, UK Retail Sales rose for a fourth month in May led by a sharp increase in the sales of electrical goods, such as high-definition televisions, in preparation for the World Cup. Sales increased by 0.5% from a revised 0.7% in April, which was largely in line with expectations.
There was some significant inflationary data released in the Euro-zone yesterday as the Consumer Price Index for the month of May came out as expected, showing a 0.3% month-on-month increase compared with 0.7% in April. Inflation in the Euro region is up at 2.5%, which is above the ECB’s predicted rate of 2.3% this year indicating that the central bank will need to lift interest rates once more following a quarter-point increase earlier this month. However, the Core CPI measured below expectations at 1.3% providing further evidence that higher energy and food prices are having an impact on the inflation gauge. There is some important data released this morning with Industrial Production widely expected to hold at 0.4% growth in April providing an indication that euro-zone exports will help quash the threat of higher oil prices and rising interest rates. The ECB elected to adopt a more measured approach with regard the tightening of monetary policy because the Euro has risen by 8% versus the dollar in the past six months alone and if the single currency appreciates much more, it will have a damaging effect on their exports.
As we predicted in Tuesday’s afternoon update, the recent resurgence of the U.S Dollar has seemingly come to a grinding halt as rising interest expectations failed to support the currency following a seven day winning streak over the past couple of weeks. We witnessed a significant day of market movement as the Dollar lost ground for a second day in succession with U.S net capital inflows plummeting in the figures for April, dropping to $46.7 billion, which is the lowest in over a year, and that is despite forecasters predictions that inflows remained relatively unchanged at $70.4 billion. However, even more significantly, U.S net capital inflows in April will be unable to cover the ever-widening U.S Trade Deficit, which came in at $63.4 billion.
There is some hugely significant data released this afternoon in the States with the U.S current account deficit expected to moderate to $220 billion in the first quarter of 2006 and the data will provide the final indication of U.S trade conditions following the disappointing trade deficit and investment flow balances. In addition, there is some equally important data released later this afternoon, which could potentially rock the dollar with U.S consumer confidence widely anticipated to drop for a third month in June with the University of Michigan’s preliminary index for consumer sentiment falling to 79, the lowest reading in eight months.
Data Released 16th June
EU 10:00 Industrial Production (April)
U.S 13:00 Current Account Deficit (Q1)
U.S 14:45 Michigan Sentiment (June Prelim)
written by Adam Solomon
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