Currency Update – Tuesday

Currency Update – Tuesday

Yesterday's bout of profit taking may have taken the Dollar's rally a few steps back yesterday morning, but it was soon on the front foot as the main drivers that have led to the rally, a view that economies around the world are softening while the US heads out of it's dip, once again made their presence felt. Even comments from an ECB member who warned that inflation risks still remained on the upside, and there was no room for complacency on interest rates, couldn't halt the Euro's fall against the Dollar, which has dropped below 1.49, a level not seen since March of this year.

The Dollar's strong inverse relationship with the price of Oil has still held with the cost of a barrel of oil dropping below $115, and heading towards $110, in spite of the recent military activity between resource rich Russia and Georgia. It seems that the high price of oil is finally having some impact upon the demand, as both the US, and oil hungry China are importing less, and the drop in demand has mitigated the potential disruption to important Caspian sea pipelines, caused by the problems in eastern Europe.

The Dollar kept the pressure on the Pound, bringing the rate down to below 1.90, a level not seen since the end of 2006. The rate has bounced upwards slightly, and today's CPI figure could bring the Pound a little strength. Yesterday's data seemed to point to a peak in the manufacturing costs, although there were still increases in the output prices at the factory fate. The Pound has also suffered as overnight news from the UK housing market showed that the price of houses continues to fall, although Sterling is still sitting are around 1.28 against the Euro.

Today we get a good look at the problem facing the MPC. It shows in stark contrast the softening economy, and inflation pressures. We've already had the British Retail Consortium's July sales monitor, which showed declining sales and weak retail activity, and the CPI has just been releases and has jumped by more than expected bringing the annual rate to 4.4%, over double the BoE's target. Food prices seem to be the main culprit for the jump, and once utility bill price rises are filtered through, the IMF's prediction of UK inflation reaching 5% could be realised soon. Sterling has not reacted strongly to the figure, possibly as many traders don't expect a rate change soon either way, but some may also be looking at tomorrow's release of the BoE inflation report to see how the people who set the rates intend to react.

Yesterday's bout of profit taking may have taken the Dollar's rally a few steps back yesterday morning, but it was soon on the front foot as the main drivers that have led to the rally, a view that economies around the world are softening while the US heads out of it's dip, once again made their presence felt.

Michael Corcoran |Treasury Solutions | nabCapital

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