MARKET REPORT TUESDAY 24^TH JUNE 2008

Good Morning,

Sterling enjoyed a strong rally against the majors last week, rising to a recent high of 1.9755 versus the U.S Dollar, and above 1.27 against the Euro after UK retail sales increased by the most in 22-years last month and reinforced speculation that the Bank of England could raise interest rates to combat inflation. However, Sterling failed to hold on to last week’s gains yesterday dropping to low 1.96 and 1.26 after a report from showed that UK house prices dropped in June by 1.2% from the previous month. With tighter lending conditions combined with higher mortgage rates for new borrowers, this means that fewer people are able to buy prices and some analysts predict that house prices will fall by as much as 9% in 2008.

Sterling sentiment was further undermined after the Deputy Governor of the Bank of England, concurred with forecasts and said that a further decline in house prices will weigh on consumer confidence and dent the prospects of an economic recovery.

Consumer prices (CPI) are expected to breach 4.0% over the coming months and the Bank may have little option but to raise borrowing costs from the current 5.0% to curb inflation. Higher labour costs will also add sentiment to raising interest rates.

 A separate report from the Royal Bank of Scotland showed that Europe ’s manufacturing and service industries unexpectedly contracted this month and reduced speculation that the ECB will raise interest rates in July.

The Euro softened against the Dollar as the reports also signal that the ECB will face the same problems as the BoE in balancing to the downside risks to growth against rising inflationary pressures.

The Dollar’s lack of direction suggests that the market is waiting for the FOMC’s interest rate decision on Wednesday evening while the oil summit in Jeddah will also attract interest. The Dollar may find some support amid hopes that Saudi Arabia will drive down the price of oil with news on increased production. However, the prior announcement on increased supply failed to make any groundbreaking impact on prices while the most important members of OPEC will be absent from the meeting altogether.

The accompanying statement of the Fed’s monetary committee will also be studied because rising inflationary concerns could signal a possible increase in rates before the end of the year.

Michael Ince

Archive News

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