BoE To Shock Us? I Think Not

We all know better than to wait with baited breath over whether the Bank of England will increase interest rates. Let’s face it, we will be stuck at 0.5 percent for sometime and tomorrow will be a non-event. However, the possibility of the European Central Bank insinuating that a rate rise may be on the horizon is far more likely and this will undoubtedly be the talking point come GMT 12:45 tomorrow. Eyes and ears open for what could be a rollercoaster day in currency… Pound Sterling Sterling has come within a whisker of trading at its lowest level against the euro in a month. This came after a report showed that UK shop price inflation decelerated in May to its lowest pace of the year. Our currency also fell against the US Dollar and the yen. This came as little surprise, continuing on from yesterday’s news where it was announced that retail figures have suffered substantially due to reduced consumer spending. We are not expecting any data out of the UK today and we are almost certain the Bank of England will hold interest rates at 0.5 percent tomorrow. The real movements will be down to how the euro and dollar perform in coming days. Dollar The dollar has taken a battering over the last week; therefore it is not surprising that Federal Reserve chairman Ben Bernanke has released a rallying statement. He acknowledged that growth had been slower than expected in the first half of the year. However, he blamed high energy prices and the Japan crisis on overall abysmal data. Be warned though, he used little economic data to back up these predictions so this spiel could have been an attempt at raising consumer confidence and expectations. An interesting review has looked at the US Dollar over a period of time. The report suggests that the dollar gained (which it did) after the financial crisis began as investors sought it out as a safe haven in which to place their currency. However, as the recovery picked up the dollar slipped (which again, it did) as risk appetite was boosted by government and Fed stimulus programs. Euro The eurozone faces a critical couple of days as a raft of data will flood the markets with current and future outlooks for the debt ridden continent. We have started very steadily with year on year and quarterly GDP figures coming in as expected at 0.8 and 2.5 percent respectively. Later this morning will see Germany release Industrial Production data and contrary to the norm we are expecting some less positive reports. However, as per usual should the figures come in as expected then the market is likely to have factored in these changes prior to the event taking place. Other Currencies – Highlights The Japanese Yen has recouped some of the losses seen off the back of the recent disaster after the International Monetary Fund said its 26 billion euro loan to Portugal includes risks that have increased demand for the yen. After a topsy-turvy few weeks the Aussie and Kiwi Dollar fell against most of their 16 major counterparts. They faced the opposite effect to Japan as Europe’s debt crisis and the struggling US economy dampened demand for growth-sensitive currencies. And unfortunately for the Aussie and the Kiwi they fall into this bracket.