Euro: Has Inflation Hurt Businesses? (page 2 of 2)

Can the British Pound extend its gains?

The British pound has had a great week thanks to broad dollar weakness and strong economic data.

The UK retail sales report has raised a lot of questions as to how much longer the Bank of England can remain on hold.

Earlier this week, Bank of England Governor King warned that inflation could hit 4% this year, which is two full percentage points higher than their inflation target.

The only thing holding the BoE back from raising interest rates now is growth, but if growth is stabilizing, then a rate hike may be just around the corner.

Unfortunately there isn't a lot of data to help the British pound next week. The calendar is relatively light except for a few reports on house prices, the final GDP numbers for the first quarter and current account.

Commodity Currencies: A mixed bag

The performance of the commodity currencies were mixed with the Canadian and New Zealand dollars giving back their recent gains while the Australian dollar gained strength for the sixth consecutive trading day.

Retail sales in Canada grew by 0.6% in April, which is the fifth monthly increase in consumer spending in the past seven months.

Part of the rise was driven by gasoline receipts, but consumers also spent more on clothing and general merchandise. However the knee jerk rally in the Canadian dollar was quickly erased on fears that Canada's Supreme Court would reject the privatization of BCE Inc, Canada's largest phone company. This was eventually approved but not until the end of the US trading session.

In the week ahead, New Zealand is the only commodity producing country with any meaningful economic data, which means that the NZD/USD is in play; the current account balance, GDP and the trade balance are due for release.

Relationship between carry trades and the Dow has broken

Over the past few weeks, there has been practically no correlation between the moves in carry trades and the move in the Dow.

This is a big departure from a year or even just a few months ago when risk appetite had the same impact on the currency and the stock market.

On Friday, the Dow dropped over 200 points and yet EUR/JPY and CHF/JPY rallied. Since the middle of May, the stock market index has tumbled more than 1000 points and yet pairs like AUD/JPY has climbed 400 pips while EUR/JPY has climbed 500 pips during the same period.

This suggests that the sell-off in stocks may not be entirely due to risk aversion.