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Global risky assets took another downward leg yesterday as the US dollar strengthened with commodity prices in particular falling through the floor. Risk remained around the Greek problem with bond yields in peripheral Europe continuing to rise alongside credit default swap, or default insurance, prices rising as market participants looked to mitigate risk. Euro and dollar both moved lower in the morning with sterling the best performer in the G10 space. GBP rose as the Bank of England delivered its quarterly MOT on the UK economy.

The quarterly inflation report was exactly as we expected with a downgrade of growth while inflation is now expected to rise past the 5% mark soon in the UK. While inflation has been stuck at around the 4% level in the first quarter we have to balance up the impact of the 4% depreciation we have seen in sterling in the past 3 months and the 25% increase in the price of oil; both have had a huge impact on inflation and will likely do so in the rest of the year as well. Growth is still uncertain too but leading indicators are showing growth in all sectors however the weakness in consumer spending will cause weakness in the short term. Expectations are that we will see business investment improve and exports help through the second half of the year while impacts such as the tsunami and the Royal Wedding will continue to make data more volatile.

As for interest rates the curve now suggests that a rate hike is now not likely until December which will come as a relief to homeowners, businesses and exporters (GBP will likely remain weak on exchange rate differentials) but the pressure on the wages of the ‘man in the street’ is likely to be long and pronounced. We are still looking for a rate rise in August however as we believe that the MPC will want to guard some semblance of credibility over its monetary policy decisions. We also expect the summer months will see an increase in consumer spending and tourism that should provide a welcome boost to the services sector.

GBP moved to a 6 week high of 1.1529 yesterday afternoon while GBP put on a full per cent against the USD before the commodity snapback erased these gains. We are looking for sterling gains to continue today through its industrial and manufacturing production numbers due out at 09.30.

Industrial and manufacturing figures are due from Europe as well at 10am followed in the US session by US April retail sales, producer prices, weekly jobless claims, and March business inventories.

Latest exchange rates at time of writing