Currencies

Tuesday May 13, 12:31 PM
Forex - Pound softens on UK economic fears

| | |

LONDON (Thomson Financial) - The pound initially spiked toward day highs against both the dollar and the euro, following news that inflation in the United Kingdom in April rose by far more than anticipated but soon gave up those gains over concerns

about the outlook for the economy.

Official figures show that the annual CPI (NYSE: CPY - news) inflation rate increased by 3.0 percent in the year to April, way ahead of analysts' expectations for a more modest increase to 2.6 percent from the previous month's 2.5 percent.

'Although the pound did initially rally sharply following the publication of the number, its gains began to be eroded very quickly as investors absorbed the broader negative economic implications of this,' said Neil Mellor, currency strategist at Bank of New York Mellon.

Today's figures raise the prospect that BoE Governor Mervyn King will have to write a letter to Chancellor of the Exchequer Alistair Darling, possibly as soon as next month, explaining why inflation has risen by more than a percentage point above the 2 percent target.

The forecast-busting inflation news puts the dilemma facing the BoE in sharp relief as overnight figures showed the housing market and high street activity going into reverse.

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 RICS and BRC releases, the pound dropped below the $1.95 mark, while the euro edged back up towards 0.80 pounds, as investors price in a growing likelihood of a BoE rate cut in June.

Elsewhere, news out of the U.S. could provide further support 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.

'Markets have been stable since the last FOMC meeting and any policy-related comments in his pre-prepared speech should reflect the Fed's new (but restrained) inflation focus reflected in the post-meeting statement,' said UBS (Virt-X: UBSN.VX - news) currency strategist Geoffrey Yu.

'With Europe following the U.S., the relative monetary policy stance between Europe and the US will give further support to the dollar,' he added.

London 1100 GMT London 0738 GMT

U.S. dollar

yen 103.77 up from 103.74

Swiss franc 1.0485 up from 1.0436

Euro

U.S. dollar 1.5463 down from 1.5510

yen 160.52 down from 160.92

Swiss franc 1.6218 up from 1.6190

pound 0.7941 down from 0.7946

Pound

U.S. dollar 1.9468 down from 1.9517