MARKET REPORT TUESDAY 1^ST JULY 2008 

Good Morning, 

Sterling remained largely unchanged against the major currencies yesterday, consolidating above t 1.9900 with a weakened Dollar, despite reports that UK consumer confidence dropped in. A separate report showed that house prices fell to the lowest level since the survey began in 1990.

Slowing consumer spending and falling home values will inevitably weigh on growth but the Bank of England Governor, Mervyn King, said last week that slowing economic growth would help contain inflation. The BoE, like many Central Banks across the globe, face a difficult balancing act in measuring the slowing pace of the economy against record high commodity and fuel prices and must decide on whether to raise interest weeks next week.

There is some price action surrounding the single currency in anticipation of the outcome from the ECB interest rate announcement this Thursday. The flash estimate of the index of European consumer prices showed that inflation accelerated by more than initial forecasts as record high food and fuel costs increase the pressure on policy makers to raise interest rates and threaten the pace of economic growth. The annual pace of inflation in the Euro-zone rose to 4.0% year-on-year in June and to the fastest pace in over 16-years and the report will shift the focus back on to the tone and language in the ECB press conference for any indication of a further increase over the coming months.

The Dollar ended a losing streak against the Euro yesterday, but may struggle to on hold to any gains as the ECB are expected to raise interest rates on the same day that U.S job growth figures are expected to show a contraction for the six consecutive month.

Michael Ince


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