giving GBP ample opportunity to move higher. However I’m choosing not to focus on

last week but instead this week’s Bank of England Quarterly Inflation Report due for

release this Wednesday. This health check lays out the Bank of England’s expectations

for the next quarter and could prove to be the most important given the crossroads at

which most analysts believe we are stood in this long trek through the credit crunch.

February’s inflation forecast is due to be lower than actual figures as domestic energy

prices have risen on the back of increases in wholesale gas prices (as mentioned in

last week’s update titled ‘Be wary of markets bearing gifts’); food suppliers raising

prices as weather disasters weigh on supply and increases in import prices as sterling

continues to flounder.

An obvious increase in the Bank of England’s inflation projections is forecast and

markets will be looking to see whether this lands above 3%. The significance of this is

of course should CPI post at 3% or higher Mervyn King in his capacity as Governor of

the Bank of England has to write an open letter to The Chancellor to explain why. This

has happened before; most recently in March ‘07.

The general tone will be hawkish with a strong probability that Mervyn et al tip their

hats to only one more rate cut in 08 which would fall in line with our expectations at the

beginning of the year. A subsequent uptick in the fortunes of sterling could be

expected; a hawkish inflation report with lower inflation figures last time round saw

sterling rally higher against the majority of its opponents.

Other data released this week includes a fairly packed Tuesday with everything from

CPI and RPI to house price data from the Royal Institute of Chartered Surveyors and

the Department of Councils and Local Government. Both inflation measures are

forecast to rise while both house price indices are set to fall; a heady cocktail which will

probably end with sterling declines

Regardless of its subsequent impact on sterling, this announcement is due to be a

fairly downcast appraisal of the health and vitality of the UK economy. Higher inflation

going hand in hand with falling growth is the sickly pill the country must swallow and try

hard not to choke. Whether the Bank of England has its own Hippocratic oath is

doubtful as we are most certainly due some harm.

The ECB will also release its Monthly report with the same inflationary concerns

expected. We will also be interested in CPI and GDP figures released Thursday.

Dollar performance will also hinge on its CPI reading, due Wednesday, and consumer

confidence figures calculated by the University of Michigan to be released on Friday.

Consumer spending hurt the single currency last week as evidence of a European

slowdown began to raise its head before Trichet and the rest of the ECB gave a

particularly hawkish press conference which dragged euro away from the week’s lows.

Retail sales fell again in March indicating a year on year decline of 1.6%, a new record.

This led analysts to predict a slight possibility of a change to ECB decision as a

reaction however Trichet slammed the door on the doves. In his speech he rolled out

his greatest hits of anti-inflationary views with a particular focus on wage settlements.

He focused also on high fuel and food costs indicating that the Eurozone still faces a

‘protracted period’ of high inflation. Some analysts are so convinced of Trichet’s

unwavering commitment to price control that the potential cut priced in for later in the

year has been removed and that now none are forecast for the remainder of 08. We

will be looking for further confirmation in price data over the next few months.

Dollar has enjoyed yet another strong week as it moved to 2 month highs against the

euro and sterling. US data has continued to help underpin the currency although the

recovery remains balanced on a knife-edge.

US PMI moved back into expansionary territory posting a reading of 52.0 against a

consensus of 49.6 showing that the service sector was beginning to get off its knees.

The jobs markets also showed a bit of steel as the effects of this month’s non-farms

payrolls continued to help; initial jobless claims only fell by 5,000 jobs but the fall was

more important than the amount and dollar bulls increased bets of further strength.

These however are only a few releases and for dollar to continue to strengthen a lot

more positive sentiment will be needed. Large potential downside exists should we see

falls in the consumer spending arena or if jobs market increases materialise to be

nothing more than seasonal.

Increases in gold prices allowed Aussie dollar to strengthen as the commodities boom

continued unabated. Gains however were capped by domestic uncertainties as the

RBA left rates on hold at 7.25% citing a significant slowdown in demand with markets

taking this an indication of interest rate cuts in the near future.

The jobs market continues to thrive in comparison with its Antipodean neighbour as a

24,500 increase in employment was seen in the month of April.

The RBNZ announced new liquidity measures this week, as some central banks have

done recently, so as to keep liquidity strong in domestic markets in light of new

developments in the global credit crunch. Most of these initiatives are in line with

current step adopted by the Bank of England most recently such as the swapping of

mortgage debt for AAA rated government bonds so banks feel more secure lending to

each other. Deputy Governor Grant Spencer stated “We are confident the banking

system can cope with current conditions, but we are taking steps to ensure it can

handle any unforeseen pressure in the current uncertain environment.” The May

financial statement for the NZ economy was also released this week although nothing

spectacular was said, markets took a downturn as fears over the intensity of the credit

crunch seemed to still worry decision makers.

Looking forward, further weakness is expected on the cross as deteriorating

fundamentals may start to weigh. Thursday’s job report was forecast to head lower

however NZD lost over a cent as it showed nearly 30k people lost their jobs in Q1. This

has intensified bets that rate cuts may be not too far off and consequently a slump in

NZD is forecast.

CAD took another run at parity with the US dollar last week as continual rises in the

price of crude oil helped the loonie higher. Although this is obviously beneficial in the

short term, we are alarmed as to the amount of support the commodities market is

having to provide and are waiting for the other shoe to drop i.e. a fall in oil prices. This

could be catastrophic and at signs of a downturn CAD sellers would be wise to look

into hedging strategies as the move could be quick and violent.

Rand continued to trade in a fairly tight band last week as conflicting influences tried to

exert their authority. ZAR is well supported by increased commodity prices however

increased energy costs will do nothing for the problematic electricity generation

industry which has so hampered mining production and driven up prices. The rand still

stays linked to the DJIA and ZAR buyers will be looking for some falls on global equity

markets to help them higher; carry trade participation has helped rand strengthen over

the past few weeks.

anytime regarding these briefings, if you have any questions or thoughts on them, or if you are

interested in a particular event in the calendar.

Please call us on 0800 001 5055 if you have any questions or would like to discuss the markets.

Please reply with REMOVE in the subject of your e-mail if you would like to be removed from

this list.

The above comments are only our views and should not be construed as advice. You should

act using your own information and judgement. Although information has been obtained from

and is based upon multiple sources the author believes to be reliable, we do not guarantee its

accuracy and it may be incomplete or condensed. All opinions and estimates constitute the

authors own judgement as of the date of the briefing and are subject to change without notice.

Any rates given are interbank and therefore for amounts of £5million and so are not indicative of

rates offered by World First for smaller amounts.