UK inflation hits 2 year high

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The lack of structured economic data yesterday made investors focus on the Eurozone and its debt crisis; the patient emitting the most blood curdling screams are usually the ones that are seen first by the medical teams. The euro was well bid yesterday, despite its obvious flaws, with investors believing that the single currency may have just been oversold too much in the short term. It wasn’t all good news though.

Rumours surrounded Italy and in particular that Finance Minister Tremonti had pleaded for the Chinese to make significant purchases of Italian debt, in order to stifle yields and reduce the country’s borrowing costs. If they were bidding yesterday however it didn’t work. An auction of Italian 1 year debt hit a yield of 4.153% vs a previous level of 2.959%. This was the highest level in 3 years and with the demand level also weaker shows that investors will continue to demand higher rates from these countries. The yield on Greek 10 year debt has risen to 25% this morning as well.

There was also a lot of gentle and calming words from the French yesterday after it was their banks that fell into the spotlight. The Governor of the Bank of France addressed solvency and liquidity concerns by stating that “No matter what the Greek scenario, and whatever measures must be passed, French banks have the means to face up to it.” This didn’t stop them losing 10% in yesterday’s session but equities are looking stronger today so a rally for the euro and other risky assets is not out of the question.

Whether sterling will gain any ground will depend almost entirely on the CPI and Trade figures out at 09.30. Inflation, as we all know, has remained very high in the UK throughout the financial crisis and shows no sign of really falling off. Friday’s increased PPI number has led to us to revise our expectation to 4.6% from 4.5% and this should give sterling a jolt higher with the market still vacillating over further QE from the Bank of England.

Trade is a more difficult one to call but given the slips in the Eurozone and other export markets we would not be surprised if net trade had fallen in the past month or so.

This is my last update of the week and I’m handing over to Joe. It’s not another holiday though as myself, my colleague Sara Cass and her husband Dave are doing a 200km charity walk in aid of the mental health charity Rethink.

Indicative Rates Sell Buy
GBPEUR 1.1608 1.1636
GBPUSD 1.5815 1.5841
EURUSD 1.3608 1.3632
GBPJPY 121.72 122.04
GBPAUD 1.5315 1.5340
GBPNZD 1.9231 1.9261
GBPCAD 1.5704 1.5733
NZDUSD 0.8213 0.8235
GBPZAR 11.71 11.76
USDZAR 7.4044 7.4359
GBPPLN 5.0098 5.0412
EURJPY 104.71 104.97

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