The Pound failed to rally against the majors on Tuesday as the negative sentiment surrounding the UK economy offset the rising inflationary concerns and speculation that the Bank of England can’t afford to cut interest rates in June.
UK producer and consumer prices rose well beyond initial forecast in April with the annual rate of inflation jumping to the highest level in over a year following record high food and energy costs.
The upside risks to price stability came in the build up to the Bank of England’s quarterly inflation today and the Governor, Mervyn King, signalled that the MPC are reluctant to continue cutting interest rates while economic growth will slow to just 1.0%.
In a much publicised statement, King said that inflation will breach the government’s 3.0% limit this year and rise to 3.7% over the coming months as rising commodity prices means that the Bank face a difficult balancing act in the months ahead.
The tone of the statement seemed to suggest that a further reduction in rates would make matters worse with a drop towards 4.5% exasperating the already severe inflationary concerns.
The Futures market has scaled back the probability of a June rate cut in the aftermath of King’s comments while a recent spate of damning economic reports shows that the slump in housing is pulling down economic growth.
The tone of the Bank’s quarterly inflation report mirrors the recent commentary from the Chancellor, Alistair Darling, who back the BoE’s stance on inflation and expressed his concerns on rising food and energy costs.
The price action surrounding the Pound suggests that the market is focused on the downside risks to growth rather than upside risks to inflation and the UK currency plunged 0.3% versus the Dollar before staging a modest recovery.
The fundamental lack of economic data released in the Euro-zone means that the single currency has been susceptible to events from overseas but the focus tomorrow morning will fall on the final estimate of the Harmonised index of consumer prices.
The broadest measure of inflation across the 15 nations that share the Euro will probably show that prices increased 0.3% in April to an annual pace of 3.3%. A separate report on Euro-zone gross domestic product will also confirm that growth in the economy fell under 2.0% in the first quarter and confirm that the U.S led economic slowdown is filtering through to Europe.
The dramatic revival in Dollar sentiment continued today as the U.S currency traded near the highest level in a week versus the Euro as gains in stocks led to a renewed appetite for higher yielding assets.
Elsewhere, the Dollar gained in support and rose to the highest level this year versus the Pound before a government report showed that U.S inflation accelerated less than forecast in April.
Consumer prices increased 0.2%, following a 0.3% gain the previous month, and suggests that the Fed can enter a period of monetary stability after slashing rates by 325 basis points in a vain attempt to bring some stability to the U.S housing sector.
Data Released 15th May
EU 09:00 ECB Monthly Bulletin Published
EU 10:00 Flash GDP (Q1)
EU 10:00 Flash Harmonised Consumer Prices (April)
U.S 13:30 Initial Jobless Claims (w/e 10th May)
U.S 13:30 Empire State Index (May)
U.S 14:00 TICs Net Capital Inflows (March)
U.S 14:15 Industrial Production (April)
U.S 15:00 Philly Fed Index (May)
U.S 18:00 NAHB Housing Index (May)
written by Adam Solomon
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