The Pound fell nearly 100 points after BoE Governor stated that the U.K. economy faces a difficult, painful adjustment and that the “balance of risks are on the downside”. The central bank leader would go on to say that although near term inflation risks remain elevated, that a sharp decline in growth will reduce the medium term risks of price stability and that expectations are that consumer prices will return to their 2% target. U.K. also unemployment rose to 2.7% from 2.6% in July, as jobless claims increase by 20,100. It was the sixth straight month of increasing unemployment and the second consecutive above 20,000. The worst housing slump in a quarter century, rising raw material costs and a slowing global economy have eaten away at corporate profits which has forced companies to cut expenses. Therefore, the BoE may have to cut rates by the end of the year to prevent a recession.
[B]Talking Points
• Japanese Yen: Runs Into Resistance at 110
• Euro: Industrial Production Flat in June
• British Pound: King Says Downside Risks OutWeigh Inflation Concerns
• US Dollar: Retail Sales on tap[/B]
The Pound fell nearly 100 points after BoE Governor stated that the U.K. economy faces a difficult, painful adjustment and that the “balance of risks are on the downside”. The central bank leader would go on to say that although near term inflation risks remain elevated, that a sharp decline in growth will reduce the medium term risks of price stability and that expectations are that consumer prices will return to their 2% target within two years. U.K. also unemployment rose to 2.7% from 2.6% in July, as jobless claims increase by 20,100. It was the sixth straight month of increasing unemployment and the second consecutive above 20,000. The worst housing slump in a quarter century, rising raw material costs and a slowing global economy have eaten away at corporate profits which has forced companies to cut expenses. Therefore, the BoE may have to cut rates by the end of the year to prevent a recession.
The EUR/USD price action during the overnight sessions was choppy as it bounced from resistance at 1.4980 and support at 1.4900. The region’s June industrial production report showed activity remained flat after the previous month’s biggest drop in nearly 16 years. Producers have had to battle rising input costs and softening demand due to a strong Euro and slowing global growth on the back of the U.S. credit crisis. The European economy more than likely contracted in the second quarter which has moved ECB officials off their hawkish bias and resulted in the Euro recent weakness. Although the central bank isn’t expected to cut rates in 2008, as growth slows expect the cries for action from European leaders to grow louder.
The upcoming retail sales report will present significant event risk for the dollar as the U.S. consumer is expected to have curbed their spending, after they have exhausted their rebate checks. The expected 0.1% decline may be underestimating the headwinds that consumers have been facing from rising gas and food prices, a housing slump and a deteriorating labor market. Wholesale inventories in June rose 1.1% as retailers have cut back their purchases in anticipation of a slower back to school season, which could set the tone for the end of the year shopping season which accounts for 70% of purchases. The dollar will struggle to build on its recent gains if the outlook for consumption diminishes. However, a better than expected result could
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