MARKET REPORT THURSDAY 12TH JUNE 2008

Good Morning,

Sterling took advantage of a broad Dollar weakness yesterday to bounce back above the 1.9650 level by the close of trading last night while the UK currency also made gains against the Euro at 1.2630 despite unemployment rising to the highest level in seven months. Claims for jobless benefits increased for a fourth consecutive month in May as weakening economic growth and the severity of the credit crisis forced companies to cut jobs. The recent reports indicate that the labour market is weakening while tighter credit conditions is weighing on consumer confidence at a time when the Bank of England can’t afford to cut interest rates and prevent the economy from drifting towards a recession.

Record high food and fuel costs is stoking the already elevated inflationary pressures and consumer prices are expected to increase further in May after hitting the government’s 3.0% limit in April. Economists believe that despite growth in the economy nearing contraction, the Bank of England are more likely to lift UK interest rates as inflation threatens to spiral out of control.

The index of consumer prices in Europe showed that inflation has accelerated at the fastest pace in 16-years and despite concerns over the future outlook of the economy, traders began pricing in at least three rate increases by the end of the year. 

The single currency may continue its positive momentum this morning as the ECB monthly bulletin is expected to convey the hawkish tone of Wednesday’s comments while a separate report on industrial production may show that output increased last month.

The Dollar weakened against both the Euro above 1.55 and Sterling yesterday as the U.S currency failed to hang on to the previous day’s gains and oil prices rose $5 a barrel in New York after inventories declined for a fourth straight week and raised concerns over supply.

Michael Ince   

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