Is everyone on holiday?
After an exceptionally strong performance last week where there was not one day that the Dollar did not appreciate against the Euro, Sterling and Kiwi Dollar, the greenback has finally given up some of its recent gains, losing around a cent against both Sterling & the Euro. Despite the view from the window it seems that markets are truly in the dog days of summer, with consolidation seemingly the theme of trading this week. The selloff in any case was fairly modest, implying that investors remain nervous and are simply waiting for a another good reason to bail out of risky currencies. Indeed the fact that the Dollar was more heavily sold against the Swiss Franc and Japanese Yen confirms that investors are still seeking safety in lower yielding currencies, whilst the recent drop in US yields gives investors even less encouragement to hold dollar denominated assets.
UK inflation should continue to decline in today’s consumer price inflation release, though
the annual rate of inflation is only likely to slip 0.1pp to stand at 3.1%. Such a reading
would trigger an eighth letter from Governor King explaining why inflation has overshot the
target by more than 1pp. In the coming months higher food and fuel prices raise the risk
that we may not see inflation come down much more until later in the year, and then of
course it will rise back again in January with the 2.5pp VAT hike.
Chancellor Osborne is due to speak this afternoon on ‘Building an economy for the future’. With thin trading, this could move markets, if as we expect, there is some concentration on the need to improve the UK’s manufacturing base. That said, with the Chancellor also expected to dwell on fiscal consolidation, any dip in sterling is likely to prove temporary.
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