MARKET REPORT WEDNESDAY 11^TH JUNE 2008

Good Morning,

The recent revival in Sterling sentiment was tested yesterday as the UK currency recorded the biggest intraday slide in nearly a month versus the Dollar trading down from above 1.97 on Monday to the low 1.95 levels after a report from the Royal Institution of Chartered Surveyors showed that the slump in house prices exceeded initial expectations and with the crisis in credit this means that mortgage lending has declined to the lowest level in at least thirty years. Dollar strength was also due to the Chairman of the Federal Reserve, Ben Bernanke, who joined the Treasury Secretary in announcing that economic risks have subsided. The recent sentiment surrounding the future outlook of the U.S economy has seen traders increase the probability of an interest rate hike while a rebound in economic fundamentals is likely to support the Dollar over the coming months.

Sterling has enjoyed a three-day winning streak against the Dollar since Friday after a report on UK producer prices showed that factory-gate inflation accelerated at the fastest pace since 1986 and may force the Bank of England to raise interest rates. Although the Pound slipped versus the Dollar, it rallied higher against the majority of the actively traded currencies as a rebound in sales coincided with an unexpected increase in manufacturing output.

However, the Pound may come under some pressure this morning with economic data due for release in the UK , with unemployment expected to increase to 2.6% in May but the monthly trade report is forecasted to show that the deficit in goods and services actually shrank in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports in Germany that wholesale prices rose 8.1% year-on-year in May, the highest since 1982, indicating that inflation threatens the economy. The report will only serve to increase speculation that the European Central Bank will need to raise interest rates in July while balancing the downside risks to economic growth.  

Michael Ince   

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