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

Sterling weakened yesterday as the market took the minutes of the latest Bank of England meeting a lot more dovishly than most had expected. The voting record stayed as expected as well with 3 voting for a rate hike vs. 1 voting for an extension of quantitative easing and 5 staying put. The overall tone was one of caution however with fears over the consumer and how a rate hike would affect the psyche and spending patterns of the man in the street. It of course comes at a time when High St spending is already depressed as is evident through service sector surveys, corporate profits and the recent GDP estimate. We do however maintain our call for a rate hike in August as a result of an increase in growth and spending over the summer months combined with inflation breaching the 5.0% level in July.

We would hope that the “Wills and Kate” effect and the late Easter will flow through to the UK retail sales figure for April that are due at 09.30. The expectation is for a rise of 0.8%.

UK Jobless claims also rose yesterday at their highest level since 2000 which will underlie the fragile nature of the UK economy and will pressure the Coalition considering we haven’t seen a broad exodus from the public sector as yet  although some of the increase in claims does also come from a rule change that shifts lone-parents onto the unemployment quota. The growth picture at the moment suggests that the private sector will not be able to sponge up these new unemployed anytime soon, a dramatic reversal of prospects would be needed to see that.

There was further chat over a ‘soft restructuring’ in Europe yesterday with most speakers coming out against the plan. Lorenzo Bini-Smaghi, an ECB member, stated that “soft restructuring” would be “devastating for the overall financial stability”; on monetary policy, the ECB decides “on a month-by-month basis. Next month we will see what the forecasts and upwards pressures on prices are”. Others classified the plan as a ‘last resort’. EUR was bid higher versus sterling on this news pushing the GBPEUR pair back into the low 1.13s while EURUSD remained flat at around 1.4250.

News from Japan is that the economy has slipped back into recession as GDP fell by 0.9% in the first quarter as a result of the earthquake and tsunami on March 11^th. The decline follows a contraction in the final quarter of last year and will increase the volume for further government spending on reconstruction, even though the debt levels in Japan are already at astronomic levels. The yen is weaker by 0.25% against the US dollar overnight.

Latest exchange rates at time of writing