As Mervyn King prepares his quill and ink to write what will be his seventh consecutive letter to Chancellor George Osborne, the question is being asked as to how nervous the Bank of England are about inflation. UK inflation is expected to increase further this morning from Junes 4.2% reading. This level is over double the Bank of England’s target level of 2% and at the moment the bank must play this scenario out very cautiously, as although they don’t want inflation getting out of control, they will also be very keen not to dampen the slow recovery by showing their hand too early or jumping the gun by raising interest rates.
Further bad news for the Eurozone look set to come as its biggest economy Germany has now started to feel the knock on effects of wallet tightening. German GDP has slowed down significantly in the second quarter and this looks set to be the case across the rest of the Eurozone. It seems that the Eurozone as a whole is flirting with the possibility of seeing a new economic slump as spending slows across the region.
At present it looks as though many currency pairs are in a state of ‘no man’s land’ and everyone is looking to see if there will be any breakaway movements. We still firmly believe that GBP/EUR will improve over the coming months and we will soon be entering a period of seeing a small but significant drop in the Euros value. Safe havens are most definitely the weapon of choice at present so it wouldn’t surprise me to see the Swiss Franc have another bout of strength over the coming weeks.
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