Currencies

Tuesday May 13, 09:04 AM
Forex - Pound retreats after another batch of soft UK data

LONDON (Thomson Financial) - The pound has been hit hard, particularly against the dollar, this morning after another batch of disappointing UK economic data overnight ratcheted up the pressure on the Bank of England to cut interest rates again in June.

While the Royal Institution of Chartered Surveyors said a record number of its members reported house price falls in the three months to April, the British Retail Consortium revealed that retail sales fell in April, the first time since 2005 that sales have declined for two straight months.

In the wake of the data's release, sterling has dropped below the $1.95 mark, while the euro has edged back up towards 0.80 pounds as investors price in a growing likelihood of a BoE rate cut in June.

'The pound has been under pressure against the dollar overnight despite ongoing inflationary threats after the release of some lacklustre economic data,' said James Hughes, market analyst at CMC Markets.

Under normal circumstances, the RICS/BRC data would make a rate reduction from the BoE a shoo-in. However, ongoing inflationary concerns, evidenced again in yesterday's producer price data for April, have prevented UK rate-setters from following the US Federal Reserve's more aggressive stance.

That 'tightrope' is likely to be further illustrated this morning with the release of April CPI inflation data. Inflation is expected to have risen further in April, helping to explain why the BoE opted not to cut interest rates for the second month running in May.

Official figures are set to show that the annual CPI (NYSE: CPY - news) inflation rate spiked up to 2.6 percent in the year to April, up 0.1 percentage point on March.

BoE governor Mervyn King has said that he expects to have to write a letter to Chancellor of the Exchequer Alistair Darling some time this year explaining why inflation has risen by more than a percentage point above the 2 percent target.

Gavin Friend, currency strategist at Commerzbank (Xetra: 803200 - news) , said the 'central question' for the pound in the short-term outside of any reaction to today's CPI data is 'to what extent will the MPC (A050540.KQ - news) look through a multi-month period of elevated prices and instead towards economic weakness lasting well into 2009'.

As a result, tomorrow's Inflation Report from the BoE will be key, said Friend.

Elsewhre, news out of the US could provide further direction for the dollar in the near term. In particular, markets will be particularly interested in what Ben Bernanke, the Fed chairman, says in a speech today.

'Anything pointing to a US economic recovery and an end to the run of rate cuts we've seen from the Fed should lend some notable support to the dollar,' said CMC Markets' Hughes.

London 0738 GMT Tokyo 1:45 p.m. (0445 GMT)

U.S. dollar

yen 103.74 down from 103.85

Swiss franc 1.0436 down from 1.0450

Euro

U.S. dollar 1.5510 down from 1.5525

yen 160.92 down from 161.26

Swiss franc 1.6190 down from 1.6224

pound 0.7946 up from 0.7945

Pound

U.S. dollar 1.9517 down from 1.9536

yen 202.46 down from 202.90