British Pound Slips Ahead of Quarterly Inflation Report (page 2 of 2)

Given market expectations for six per cent interest rates by the end of the year, in order to satisfy market expectations, the BoE will have to be hawkish.

Economic data has been mixed. Retail sales were weaker than expected in June but the labour market tightened. On a headline level, annualised consumer price growth slowed, but taking a look at just core prices, inflationary pressures actually increased. At this point the UK economy could handle a year end interest rate hike, but the outbreak of Foot and Mouth disease brings with it new risks.

It is at an early juncture which means it may not matter much to the central bank. Yet, the British pound has given back all of last week's gains following the discovery of another case of Foot and Mouth and the release of weaker than expected BRC retail sales today.

The last outbreak in 2001 cost the UK as much as GBP10bn. Local groups are already screaming that the ban on livestock exports could cause the meat and livestock industry to lose as much as GBP10m a day.

Sharp reversal candles in yen crosses

Strong reversal candles can be seen in all of the Yen crosses, but USD/JPY was the only pair that managed to end the US trading session in positive territory. The Dow Jones continued to be the primary driver of yen strength or weakness given the lack of Japanese economic data released overnight.

The Bank of Japan did release its monthly economic report however in which it raised its labour market assessment for the first time in two years. On the economy, the BoJ feels that the outlook has not changed. Finance Minister Omi and Economic Minister Ota beg to differ.

Omi claims that Japan has beaten deflation while Ota indicated that the economy and labour market are both improving. Japanese Machine orders are due for release tonight. A big retracement is expected after last month's rise.

Euro falls back into its ranges
The euro's failure to close near its high yesterday was a good leading indicator for today's weakness. In contrast to the sharp rise in factory orders, industrial production actually fell short of expectations in June.

It appears that big ticket items boosted orders and those take time to be reflected in production. Current account and trade figures from Germany are due for release tomorrow. Although we could see further losses in the euro, support should come in at 1.3670.

The European Central Bank is still expected to raise interest rates next month and there is no major US or European data left on the economic calendar. As a result, the EUR/USD is most likely expected to revert back into 1.3600-1.3850 trading range.