MARKET REPORT WEDNESDAY 18^th JUNE 2008

Good Morning,

Sterling declined against the majors yesterday, falling below 1.26 against the Euro and1.9500 against the Dollar after UK consumer prices (CPI) showed that prices increased by 3.3% from this stage last year. This report conveyed the message that UK inflation had reached the highest level since the Labour Party came to power in 1997 and the Governor of the Bank of England had to write an explanation to the Chancellor Alistair Darling.

Sterling reversed previous gains as Mervyn King predicted that although inflation will exceed 4% over the coming months - which will curtail the pace of economic growth and push the economy close towards a recession - interest rates are likely to be kept on hold at 5% instead of the anticipated increase to curb the current inflation.

The focus this morning will fall on the release of the minutes from the Bank's last policy meeting and the voting pattern of the nine-strong committee. The tone and language used in the accompanying statement will be heavily scrutinized but Sterling is unlikely to find any support unless the committee voted unanimously to hold rates this month.

The positive momentum surrounding the Euro and the prospect of an interest rate hike in Europe has seen the single currency rally for a second consecutive day against the Dollar above 1.55 again despite reports that investor confidence in Germany fell to the lowest level in over 15-years. The ZEW Centre for European Economic Research said that its index of investor and analyst expectations fell to the lowest level since December 1992 as rising inflationary concerns weigh on the outlook for the economy while the prospect of a July rate increase may exacerbate the slowdown. 

Record high commodity prices, combined with a strong Euro and weakening demand from overseas means that the economy is unlikely to sustain its fastest pace of expansion as recent reports indicate that cracks are beginning to show in the economy with Europe no longer immune to a U.S led global recession. Nevertheless, the Euro continued to rally against the majors as the market anticipates a rate hike soon following a series of statements from a number of ECB officials who still view inflation as the single biggest threat to the economy. 

The Dollar softened yesterday despite oil prices retreating from a record $140 a barrel on Monday but a report on the depleted U.S housing market showed that builders broke ground on the fewest number of new homes for 17-years

The U.S currency may be mixed today after economic weakness with speculation of when the Federal Reserve will consider increasing borrowing costs this year.

Michael Ince

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