Inflation in Overdrive

Today sparks a day of furious talks in Europe and in the UK – both surrounding the central banks, but on the flip side, both for very different reasons. The European Central Bank is focussed on finding a successor for Managing Director Dominque Strauss-Kahn, who was jailed on charges including attempted rape. On the other hand, the Bank of England will be concentrating on how we can possible stem the accelerating rates of inflation placing increasing strains on the UK economy.

Pound Sterling – UK Markets

Sterling snapped 5-day declines versus the US Dollar before reports showed that inflation accelerated in April. Bank of England Governor Mervyn King, speaking last week was quoted as saying inflation remains “uncomfortably high” as central bank officials furthered rumours that an interest rate rise may be back on the cards at some stage later this year. Who knows anymore… Speaking only the truth, King was once again correct. This morning has seen inflation rise to 4.5 percent, which is 0.4 percent above expected. Initially the BoE will sit down and re-assess a possible interest rate rise, but we wouldn’t expect anything to occur in the short term since increasing rates would not have an immediate effect on the economy.

US Dollar – US Markets

Continuing on from yesterday’s analysis of the US economy President Barack Obama has done little to quell fears by stating that a failure to raise the debt limit could trigger an overwhelming economic and financial crisis. America’s annual deficit is expected to hit $1.4 trillion this year and therefore republicans are pushing for certain guarantees that this deficit will be reduced before they agree to severe debt restructuring mechanisms. A worrying revelation from political idealist’s thinktank Third Way yesterday stated that the US could fall back into recession if the nation were to default on its debt. Failure could impact some 640,000 jobs, stocks falling and severe lending contraction.

Euro – European Markets

Whilst talks continue over Greece’s debt restructuring the euro managed to gain for a second consecutive day versus the yen as a European finance officials meeting in Brussels gave the go-ahead for a bailout for the debt ridden nation that is Portugal. Furthermore, speculation continues that the ECB will add to last months interest rate rise on the back of accelerating price pressures. With Greece still in an unsightly mess, European finance ministers floated the idea of talks with bondholders over potentially extending Greece’s debt repayments after the initial bailout package has failed to restore the nation’s economic health.

Other Currencies – Highlights

The Canadian Dollar has crashed against 15 out of 16 of its most traded counterparts and most notably against the US Dollar. The fall comes as heightened risk aversion pushed commodities and stocks lower. On the flip side, another heavily based commodity currency, the Australian Dollar rose after the Reserve Bank revealed it may need to raise borrowing costs. This report outweighs concerns interest rates won’t be increased as the currency’s strength curbs price pressures.