The British pound is still struggling after Mervyn King's letter to Chancellor of the Exchequer Alistair Darling which indicated that the current high inflation rate above 3% is temporary and is to go lower but it can rise above 4$ in the next half of this year. The inflation rate has reached 3.3% y/y in May and the market was expecting 3.2% and .6% m/m from .8% m/m in April. The pound declined after the data not as the rising inflation currently does not smooth for a rate hike but it tells that the buying power of the British pound is going lower and the BOE is hold back from tightening as the weak growth. The high prices can tackle the growth further as it tackles the demand. The continued high prices of energy and commodities are going against the demand from another side which make the British economy outlook is threat by the recession forces which surely can dampen the demand for the cable which was almost rises recently in the times of the greenback weakness not on an optimistic change in UK. Today's BOE minutes have shown that the members are split between hiking, rising or keeping and all the options have been discussed and they are all reasonable but what's the worst to work against it? The answer is still flexible and unknown yet!
The greenback was depressed in the beginning of this week by No new announcement from the G8 finance ministers concerning the greenback depreciated value and its impact on the global inflation upside risks currently have disappointed the greenback which has had another hit from today's weak NY June manufacturing index which came negatively by
8.68 and the market was expecting just -1.5. The treasury secretary Paulsen's comments have helped the greenback when he said that he would never take FX intervention off the table and the market was waiting for further aggressive announcement from this meeting but it was just the repeated mantra that he is still supporting the strong dollar policy and the US economic fundamentals are good.In spite of yesterday dovish germane ZEW economic sentiment of May which came negatively by 52.4, the single currency gets its reinforcement above 1.545 from the market expectation of a coming hike in July can go further if the inflation in EU persisted. yesterday release of the EU HICP of May which came at 3.7% from 3.3% in April highlighted the need for the mentioned interest rate hike next July supporting the single currency across the broad. The ECB has shown its inflation concerns and its readiness to act to reinforce the price stability over the medium term. The ECB inflation target is just
2% and the rate comes out each month well above 3% this year fueled by the high oil and commodities prices and the release of May which was the highest among them all at 3.7%.Best wishes
FX Consultant Walid Salah El Din E-Mail: snipped-for-privacy@fx-recommends.com