MARKET REPORT WEDNESDAY 14 TH MAY 2008

Good Morning,

The Pound enjoyed a strong intraday rally against the Dollar on Monday as UK producer prices increased and showed that manufacturers have little choice but to pass on record high raw material costs to the consumer. The report improved Sterling sentiment as rising inflationary pressures make it difficult for the Bank of England to begin a prolonged period of monetary easing. However, the Pound resumed the downward momentum against the Dollar yesterday, dropping ever closer towards the yearly low at 1.9388 this also continued against the Euro trading down to 1.2550 levels. The Consumer Price Index, which is widely regarded as the broadest measure of inflation, showed that prices rose 3.0% from this stage last year to report the biggest monthly increase since 2002.

Rising food and energy costs have stoked inflation but the report massively exceeded initial forecasts and will force the Governor of the Bank of England to write a letter of explanation to the government. The two reports combined have sparked controversy that the real threat to the UK economy is inflation and the MPC may need to rethink their plans of a June rate cut.

The outcome of the June meeting should become clearer after the Bank of England’s quarterly inflation report this morning, which should be hawkish in tone given the recent commentary from Mervyn King and the dramatic increase in consumer prices.

The Euro has been susceptible to a barrage of weak data in recent weeks and the single currency has continued to decline against the Dollar while taking advantage of broad Sterling weakness to close last night below the1.2600 level.The surge in commodity prices prompted ECB governing council member, Jean-Claude Juncker, to reiterate that “inflation remains a major concern”. That sentiment was reflected by the President of the Central Bank, Jean-Claude Trichet, who said that inflation will remain high for some time, which indicates that the ECB are in no hurry to reduce interest rates. In terms of economic data, the Euro may come under some pressure this morning as a gauge of industrial production is expected to show a further softening in output for March.

The Dollar regained ground against the Euro yesterday and also registered further gains against the Pound after a government report showed that U.S retail sales exceeded initial forecasts in April and added to speculation that the Federal Reserve will stop cutting borrowing costs. Elsewhere, the Dollar stood firm as the Fed Chairman, Ben Bernanke, did his best to supper the renewed optimism surrounding the outlook for the U.S economy. In a speech in Atlanta yesterday, Bernanke said that the turmoil surrounding financial markets is far from over and that the Reserve Bank will increase its monthly auction of emergency funding. His comments are in stark contrast to a recent testimony from the Treasury Secretary, Hank Paulson, who said that the worst of the credit crisis is behind us.

Michael ince

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