Daily Market Report 22/05/13

Tuesday once again saw sterling on the back foot as inflation data from the UK had its largest decrease in one year. Despite this figure actually falling more in line with the Bank’s target and echoing the Bank’s stance on inflation following last week’s inflation report, the pound weakened across the board. When you read between the lines, lower inflation in the short term is not a bad thing especially when you consider the price of goods (including fuel costs) have certainly risen faster than average salaries.

Tuesday once again saw sterling on the back foot as inflation data from the UK had its largest decrease in one year. Despite this figure actually falling more in line with the Bank’s target and echoing the Bank’s stance on inflation following last week’s inflation report, the pound weakened across the board. When you read between the lines, lower inflation in the short term is not a bad thing especially when you consider the price of goods (including fuel costs) have certainly risen faster than average salaries. However investors will look at the bigger, longer term picture when old school policy of curtailing inflation by raising interest rates was employed. However, the UK is certainly in no position to increase interest rates as this would severely damage the UK’s delicate economic recovery.

The pound has also come under pressure in anticipation of the meeting minutes from the last Bank of England interest rate decision. With Mervin King stepping down as Governor there is some speculation that Mark Carney could try to make his mark quickly and although this should not impact the decisions made at the moment, a feeling of uncertainty is currently shadowing the UK’s economy.

The US dollar has certainly been hailed as the biggest mover over the last week and US dollar strength continues to dominate the headlines. Once again, the old school mind set of dollar = safe haven is still true but seemingly endless highs on share prices should not lend themselves to a strong dollar.

Today the US dollar will once again be in the spotlight as Ben Bernanke will speak about the Fed’s most recent FOMC meeting. Will he highlight the speculation surrounding the Fed’s fiscal stimulus? Many economists are already of the mind-set that the US will scale down its QE program very soon. Viewed as more of a when rather than if, less QE will mean less ‘cheap’ money in the markets and thoughts of this most recent bubble bursting could be realised. We have already seen the US dollar strengthen over 3% in ten days. Might this just be the savvy investors flocking to the greenback in anticipation of market sentiment?

The euro has thus far had a very quiet week and Wednesday is no exception. The pound did drop to a one month low against the single currency on Tuesday and any additional slips could mean a new trading range following almost 4 weeks of sideways movement. Dropping out of the trading range now would certainly mean 1.17 would be well out of sight.

As well as the release of the Bank of England Minutes, the market will also await the release of UK retail sales figures and public sector borrowing for April and the IMF will publish its annual economic verdict on the UK.

Key Announcements:

9.30am – GBP – Bank of England Minutes.

9.30am – GBP – Public Sector Borrowing (Apr): The deficit is forecasted to reduce to £7bn.

9.30am – GBP – Retail Sales (YoY) (Apr): Expected to increase to 2%.

12.00pm – GBP – IMF Verdict on UK Economy.

13.30pm – CAD – Retail Sales (MoM) (Mar): Expected to fall to 0.1%.

15.00pm – USD – Existing Home Sales (Apr): Expected to improve to 4.99mln.

15.00pm – USD – Fed’s Bernanke’s Speech.

19.00pm – USD – FOMC Minutes