Foreign Currency Report – 05 June 2007

GBP

With the almost guaranteed interest rate increase of 0.25 already priced in, it is left for the market to question if this is enough ahead of next weeks decision.

Although a pole of 61 analysts by Reuters showed only 14 believe that rates will hit 5.75% this year, there is strong evidence to suggest this may not be enough. The last time the retail price index, a key indicator of inflation, was sitting at 4.8% was in 1991, the base rate at the time Around 10%. Now it's just 5.25%.

M4 Money supply figures this week showed a 12.8% growth rate, whilst economic growth and wage figures both remained in single figures. Bank of England Governor, Mervyn King, recently said he has concerns over the imbalance and the level of borrowing being used to support it and that the BoE will be looking at measures to redress this.

Any delay or shortfall in the interest rate increases will cause further inflationary pressure.

EUR

A relatively quiet day in Europe yesterday has led to all eyes focusing on today's PMI data to give an indication on the strength of the European service industries.

The consensus is that figures will show a third consecutive month of growth, further supporting the European Central Bank in an interest rate increase,

ECB member Liebscher acknowledged this stating "the central bank needs to remain vigilant to ensure price stability."

Decisions in both Europe and the UK on Wednesday are expected to reflect the need for inflation control.

USD

The US dollar has fluctuated this week amid data releases giving conflicting information to investors. Reports on Wednesday of strong growth in factory orders for March led to a brief rally for the dollar, but this is likely to be tempered by the Non-farm payroll and unemployment data due for release today.

Non-farm payrolls measure the number of people on the payrolls of all non-agricultural businesses and it is the most anticipated figure in the US employment sector. US payroll services firm ADP reported an unexpectedly small increase in job creation, suggesting that today's confirmed numbers may disappoint.

There is confidence that unemployment figures will not move a great deal, however this should not be considered an indication of a strong US economy. Conventionally firms lose business before making redundancies, not the other way round.

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