MARKET REPORT TUESDAY 17^TH MAY 2008

Good Morning,

The Pound rallied against both the Dollar and the Euro yesterday amid speculation that UK inflation will exceed the Bank of England’s target in May and consumer prices may edge above 3.0% for a second month in a row. The UK currency staged a strong intraday move against the Dollar, rising to a high of 1.9685 during the European session, while the Pound also peaked above 1.2700 versus the Euro as the possibility of a UK interest rate hike improves by the day. The release of the UK consumer price index this morning has promoted speculation that the Bank of England will keep interest rates on hold for the remainder of the year in an attempt to tame inflation.

The Euro staged a modest rebound against the Dollar yesterday, rising as much as 0.7% by the close of trading last night after an EU report showed that inflation in the Euro-zone accelerated at the fastest pace in 16-years and exceeded initial forecasts last month.

The index of consumer prices showed that inflation soared to 3.7% year-on-year in May, the highest level since June 1992, as food and energy costs continue to rocket higher and pose a “more complicated” dilemma for the ECB.

Officials from the Group of Eight nations said yesterday in a meeting in Japan that rising commodity prices are posing a serious challenge to economic growth and the ECB President, Trichet, responded by indicating that policy makers could raise interest rates in July. Nevertheless, the Euro failed to hold firm against Sterling and the single currency may struggle to make gains this morning as the focus switches to the ZEW index for investor confidence in Germany .  

The Dollar endured a poor day against the majors yesterday as a combination of weakening domestic demand and rising oil prices saw the U.S currency weaken against the Pound and fall by the most in over a week versus the Euro. The dramatic slump in housing and home construction shows few signs of slowing while sales of U.S autos have fallen to the lowest level in 15 years, which is hurting U.S factories and threatening to cause more job cuts

Michael Ince

Archive News

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