The British pound was the only currency that managed to strengthen against the US dollar today. Despite an exchange rate of 2.0 in the month of April, the trade deficit actually narrowed to a 2 year low thanks to an improvement in the oil sector.
Inflation numbers were also stronger than expected as the annualized growth of core prices increased from 1.8 to 1.9 percent in the month of May. Both of these numbers illustrate the UK economy?s resilience to a strong currency. The same is expected in tomorrow?s labor market figures. Strength in the employment component of both the service and manufacturing ISM reports suggest that we could see a continual drop in jobless claims. A better economic outlook is one of the primary reasons why Bank of England Governor King was so hawkish yesterday evening. His concern for inflation is a clear sign that the central bank plans on increasing interest rates again. The fact that economic data did not worsen given the strength of the British Pound is just another reason why 6 percent rates is a valid possibility.