httpvh://www.youtube.com/watch?v=wxJpLAQJAX4

Inflation in the UK continues to push higher it was shown yesterday with CPI rising to an unexpected 4.5% from 4.0% previously. While price increases have obviously been seen in fuel and energy prices we also saw a jump in the core consumer price measure which discounts these factors away. Big increases were seen in alcohol and tobacco (8.9%) and transport (20.5%) in the month of April. This solidifies the Bank of England’s view in last week’s quarterly inflation report that suggested that CPI will likely hit 5% soon and leads us to believe that a rate rise in August is now more likely than ever. This gave a sterling a big old push higher after the release with GBPEUR hitting 1.1515 and GBPUSD through the 1.63 mark albeit briefly.

In the letter between the Chancellor and Mervyn King the tone was somewhat dovish. The Governor agreed that inflation remains driven by energy and import prices first of all and the higher VAT and is likely to rise further over the next few months as petrol prices and utility bills increase though he expects CPI to fall during 2012 and 2013. The tone was cautious as well and some traders took this as cue to sell the pound from its highs. Ben Broadbent, Andrew Sentence’s replacement on the MPC, gave testimony yesterday in front of the Treasury Select Committee and came across as a member of the doves camp i.e. not looking for rate hikes anytime soon as he believes inflation will be back at 2% regardless of any change in monetary policy in the next 3 months

We do expect that today’s minutes from the May Bank of England meeting will show the 5 members of the MPC who are still sitting on the fence will now start leaning towards hikes however given the large increase in inflation seen during the month.

It’s all gone quiet in Europe over the past 24hrs with the focus swopping to the US as they reached the maximum level of debt prescribed by Congress called the ‘Debt Ceiling’. Payments into some US pension funds have stopped to prevent against default until the measure can be debated in Congress, some say this could take as long as August. This forms part of our belief that the USD will weaken over the course of H2 and the market is selling USD at the moment.

Australia has had its 4 major banks downgraded by Moody’s overnight on their reliance to overseas debt markets. Given the ructions caused by the Greek problem debt agencies are looking more and more at who uses bond markets to a large level and with average funding ratios around 40% from wholesale markets, they have raided the red flag. AUDUSD was largely unchanged on the news.

We’ve already touched on the Bank of England minutes at 09.30 which are published alongside UK unemployment data. We expect the releases to stay near consensus although wage growth may fall on smaller bonus payments.

Latest exchange rates at time of writing