MARKET REPORT THURSDAY 10^TH JULY 2008

Good Morning,

Sterling gained ground late last night against the Dollar trading above 1.98 levels and 1.26 against the Euro. However, Sterling eased this morning ahead of the Bank of England interest rate decision at 12.00 the MPC is widely expected to keep the bank rate on hold at 5.00% today. Inflation is at its highest level since the Bank of England was given the power to set interest rates in 1997. Economists view that the MPC will be reluctant to raise the Bank rate this year, despite the outlook for inflation to reach above 4% as the recent run of poor economic data shows that output / growth is slowing in the UK. Sterling declined further against the dollar and euro following the release of the Halifax house price index which came in weaker than the market expected. The data showed that UK house prices fell 2% in June, providing further evidence that the housing market downturn is gathering pace and making things even more difficult for policymakers faced with slowing growth and rising inflation.

The Dollar gained broadly this morning as oil prices inched lower, but investors remain cautious due to worries about more credit market turmoil and geopolitical tensions. Today’s key US event is likely to be FED Chairman Bernanke’s testimony on financial markets to Congress this afternoon.

Yesterday, the Euro lost ground against sterling following a downward revision to Euro area 1 st Quarter GDP growth. The data revision decreased market expectations of further ECB interest rate hikes this year. The Bank of Italy’s governor commented that last week’s rate rise had already started to curb inflation expectations in the euro area.

The dollar fell yesterday afternoon, to 1.9830 against sterling, as further news about Iran’s missile test-firing unsettled us equity markets. An attack on the US consulate in Istanbul added to negative sentiment towards the dollar. Pressure on the dollar was also exerted by lingering fears of more credit-related write-downs at some financial institutions.

Michael Ince

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