Ahead of this evenings monetary policy press conference by Fed Chairman Ben Bernanke, the US dollar gathered strength and at one point was 1% higher against the pound before erasing some of its gains following some soft data from the US.

The day started off with mixed data from the UK. Inflation rose in May to 2.7% up from a seven month low of 2.4% in April. However producer price inflation failed to live up to expectations coming in at 1.2% in May instead of a rise of 1.5%

Ahead of this evenings monetary policy press conference by Fed Chairman Ben Bernanke, the US dollar gathered strength and at one point was 1% higher against the pound before erasing some of its gains following some soft data from the US.

The day started off with mixed data from the UK. Inflation rose in May to 2.7% up from a seven month low of 2.4% in April. However producer price inflation failed to live up to expectations coming in at 1.2% in May instead of a rise of 1.5%

Shortly after, data from Germany showed that the ZEW survey of economic sentiment rose in June from 36.4 to 38.5 beyond analysts expectations of a rise to 38.1.

A combination of better than expected data from Europe, fairly disappointing figures from the UK and uncertainty surrounding today’s press conference by Bernanke caused the pound to fall to its lowest level against the euro in three weeks and the lowest level in a week against the US dollar.

Indeed the uncertainty surrounding tonight’s monetary policy statement seemed to be a key driver of markets generally yesterday as we saw the yen, a key contributor to the recent weakness of the US dollar, and emerging market currencies such as the rupee weaken. The rupee weakened to a record low against the pound, losing 1.1% intraday.

As the day progressed, the US dollar gave up half of its gains against the pound as inflation data, building permits and housing starts all seemed to disappoint markets. The US rate of inflation remained at 1.4% in May, building permits fell to 974,000 in May and US housing starts fell short of a rise to 950,000 only coming in at 914,000.

Looking ahead to today, we have the Bank of England minutes set to reveal voting to remain unchanged with regards to interest rates and QE in the UK. However the big event of the day will be the Feds Monetary Policy statement. Will Bernanke signal again a tapering of the US QE program as early as the summer, like in last month’s statement or will he refrain to reduce QE until later this year?

His comments will be closely scrutinised; and if he signals the reduction to occur very soon, then we could well see the US dollar gather strength. However any comments which suggest that the Fed may not look to taper the program until later this year may actually cause the recent uptrend for GBPUSD to continue.

Key Announcements:

9.30am – GBP – Bank of England Minutes.

13.30pm – CAD – Wholesale Sales (MoM) (Apr): Expected to remain at 0.3%.

17.40pm – CAD – BoC Governor Poloz Speech.

19.00pm – USD – Fed Interest Rate Decision: Expected to remain at 0.25%.

19.30pm – USD – Fed Monetary Policy Statement and Press Conference.