The Dollar rallied sharply yesterday on hawkish comments from Paulson and Plosser

With little in the way of economic data yesterday comments from Treasury Secretary Paulson and Philly Fed President Plosser were always going to be a key focus for dealers and neither man disappointed.

Henry Paulson churned out the familiar party line that a strong dollar is important to U.S. interests and the underlying strength of the economy while Charles Plosser said that rising inflation could force the Fed to start raising interest rates before labour and financial markets recover.

Oil also played a part in the dollar's rise as the price of a barrel of oil dropped $4.63 to a six week low of $126.40 as fears of tropical storm - expected to turn hurricane - Dolly hitting oil production sites in Texas receded.

Reaction to Paulson and Plosser was enough to offset an earlier slide in the dollar triggered by weaker than expected earnings announced by Wachovia. America's fourth largest bank reported a record US$8.86 billion second-quarter loss and slashed its dividend for a second time this year.

Wachovia had projected a US$2.6 billion to US$2.8 billion quarterly loss and added to the gloomy news by announcing it will slash nearly 11,000 jobs.

The jobs news does not bode well for the US non-farm payrolls report due out next week which has already shown that the US economy has shed a total of 438,000 in the first six months of the year.

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To grow or not to grow?

Oil came off further yesterday at one point below $130 a barrel.

Rather than being a reduction in demand for oil it seems more centred on US sentiment that they would dip into their own strategic supply if necessary. On the back of this drop, the US Dollar made gains and the Dow Jones recovered somewhat, moving away from bear market country.

Oil was not the only mover with natural gas coming off recent highs to levels not seen since early May. It was also a much better day for equity markets with house builders and banks both making gains from their previous deflated levels.

Today we have seen the German Producer Prices Inflation figure which reported the highest rise in 26 years. As with other global PPI increases, this sharp rise is again on the back of high commodity and energy prices.

Since the release of the figures, Trichet has been talking about the lack of sustainable growth within the EuroZone now being the main focus.

This is starting to become a common trend amongst Central Bank Heads with Bernanke, King and now Trichet all indicating that they are not looking to try and manipulate inflation in the short term (a futile exercise anyway) but to concentrate on ensuring that growth is the immediate focus.

On the currencies Dollar sentiment is still somewhat tarnished as confidence in the US remains frail. The Fed's reluctance to increase rates, even with inflationary pressures, will have a knock-on effect on the Greenback.

As there is no data out from the US the main focus today will be the Dow Jones opening and the effect that Merrill Lynch's numbers release will have.

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Dollar weakness prevails

The value of oil came off yesterday, at one point down by $10 a barrel after concerns were again expressed about the state of the US economy and that this in turn, would lower demand for crude.

Bernanke's speech warned of "downside risks" to growth and "upside risks" to inflation causing the volatility in the oil and equity markets as the Dow and FTSE both made large losses on the day.

Yesterdays Retail Sales in the US saw a slight increase at 0.1% and if you strip out gasoline a decline of 0.5%. The US today sees CPI figures released expected to be around a 0.7% an increase to 4.5% year-on-year.

We will also see the FOMC meeting minutes which, after Bernanke's testimonies should not give much more away, other than the views of some of the more hawkish Fed presidents.

The EuroZone sees the HICP inflation indicator this morning and is expected to remain at 4% again down to commodity, energy and food prices rising. The medium term goal for the ECB is to keep inflation at or below 2% so could we see another rate hike next month, or is growth going to be the overriding factor here?

At home today not too much data, we have the Unemployment figures expected to be up slightly around 10,000 extra claimants. Gordon Brown is meeting with the Nigerian President today regarding their oil crisis. Another interesting article in the Telegraph today indicating a 40% chance of a 0.25% rate cut at the beginning of next month.

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One step forward, two steps back

The various Markets started down the road that is the second half of the year with some optimism but got hit by another almighty truck speeding towards them. Equity. Bond, Commodity and Currency Markets all spent the day on the defensive amid widespread wailing and wringing of hands.

Stock Markets are having a torrid time with both the FTSE and Dow just a smidge away from entering respective official bear markets, indicated by a fall of 20% from the previous peak (FTSE is currently down 18.5%).

The NIKKEI last night closed after its 10th consecutive day of losses, the longest sequence since 1965 having lost about 8% of its value during this period. This morning sees UK stocks already under pressure with both Construction and Retail sectors under pressure – M&S pontificating that retail conditions will remain grim for the next 2-years.

Dissonance reigns in Europe over the ECB decision on interest rates scheduled for Thursday lunchtime. The Central Bank have manoeuvred themselves into a corner over the decision on raising rates having already primed the Markets for such a move.

Politicians however can see the writing on the wall and have been voluble in their questioning the wisdom of such a move. With economic data from Eurozone very much on a down, the hiking of rates is unlikely to go down well across the region.

In the UK, data was also negative with the PMI lower than expected (45.8 ag exp 49.8) to a 7-year low, house prices fell for the 8th straight month declining at their sharpest rate since December 1992 – according to the Nationwide Building Society and Sterling accordingly dipped down to 1.26 against the Euro.

The only currency that fared worse than the pound was the US Dollar which suffered at the hands of a continued rise in crude oil prices (Israeli sabre-rattling towards Iran in response to the latter's nuclear programme) and the decline in the Global economy.

Cable briefly hit 2.00, but very briefly. By the time you had said "€˜I will have some Dollars there please' it was heading lower.

The quandary for market participants is for everything that you sell, you need something to buy.

On that basis the high yield commodity based currencies might have some latent strength in them and I particularly like the prospects for the Norwegian Krone with oil reserves, independence and relatively high interest rates. We will see.

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OPEC to boost Oil output but little impact on prices

A summit held in Jeddah over the weekend which included representatives from all the major oil producing and consuming nations resulted in somewhat of a stalemate, as few of those on the supply side agreed that action was required by producers in order to curb the rising cost of oil.

Although blaming speculators for record prices, Saudi Arabia as head of OPEC has though agreed to increase production by 200,000 barrels per day by the end of July.

Saudi King Abdullah bin Abdul-Aziz stated that he was concerned about the global economic instability caused by higher prices and reaffirmed that, "€œWe declare our readiness to meet any additional needs."

Doubts that the summit will have any significant short-term impact on prices due to the continuing attacks on infrastructure in Nigeria and growing tensions between oil companies and the Kremlin were confirmed this morning as crude remained above $136.

The weekend has also emphasised the widening rift amongst OPEC's members over how the cartel should react to the demands of consuming nations to increase supply.

Several members including Algeria and Qatar have argued against increasing supply because speculators will drive up the price of oil whatever the production levels, whilst only Kuwait has publicly declared it is willing to follow Saudi Arabia's route if required.

Gordon Brown announced during his speech to the summit that Britain's energy industry would be opened up to encourage investment from oil producing nations in order to advance alternative energy sources.

Last Friday's EU meeting in Brussels also witnessed disagreement amongst leaders on a number of issues including the Irish rejection of the Lisbon Treaty and the possible future enlargement of the bloc.

President Sarkozy expressed his belief that the EU could not be expanded to include countries such as Croatia without the treaty being in place. This view was supported by a number of leaders including Angela Merkel, however others such as Silvio Berlusconi argued that enlargement should take place sooner rather than later.

In the markets, Friday capped a miserable week for the FTSE 100 as it ended the week down 88 points at 5620. On Wall Street the Dow fared little better slipping 1.9% by close of trading on the back of growing concerns over possible further downgrades in the financial sector.

In the currency markets Sterling fell against the euro as traders became less confident in a UK rate change and ended the week down 2% at 1.26. Preceding this week's Fed announcement on interest rates the dollar posted its biggest weekly decrease (3%) against the euro as EURUSD finished at 1.56, whilst cable closed at 1.97.

There are a number of important reports due for release this week including today's German IFO business survey, which will be closely scrutinised after last week's ZEW index reported that investor confidence had fallen to its lowest level for almost 16 years.

Tuesday will see the release of data in the US on consumer confidence before Wednesday's Fed announcement on interest rates. The market is predicting that rates will be kept on hold at 2% on the back of gloomy data still emanating from the housing market.

In relation to the UK, the CBI's Distributive Trades Survey will be released on Wednesday and will be significant as it is acknowledged that both the BOE and UK government place greater weight on the report as an indicator of short-term trends in the retail sector than last week's consumer index.

The week ends with the release by the Office of National Statistics of the finalised UK GDP figures for the first quarter of 2008

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Oil reaches another record high day before CPI released

Inflation in the Eurozone during May was 3.7% according to figures released by the EU's official statistical office yesterday, up from 3.3% in April.

These levels of inflation have not been witnessed since the Eurozone was created in January 1999 and will add weight to the calls for a rate increase by the ECB as early as next month.

Soaring commodity prices combined with mounting wage pressures are creating a situation in which it looks increasingly likely that the ECB will place the combating of inflation above the need to maintain economic growth.

Despite an announcement by Saudi Arabia that it plans to boost oil production to its highest level in 25 years, oil prices jumped on Monday to a fresh record high of $140 a barrel whilst the dollar fell against sterling and the euro.

EURUSD was driven up through 1.54 and then 1.55 overnight with cable also pushed higher but was unable to beat the 1.97 upside barrier.

This continued rise in the price of oil was clearly one of the main topics of discussion at last weekend's G8 summit.

Despite the split between the finance ministers as to the cause of the record prices, all were in agreement that the inflationary effect of rising commodity prices were making the job of policy makers a lot more complicated.

Hank Paulson, the US Treasury secretary attempted to again talk up the dollar and argued that the high oil price, "€œbrings the risk that the slowdown in our economy is going to be prolonged." As mentioned yesterday, the markets are predicting an increase of 75 basis points in rates by year end, however the Fed yesterday warned that although there is a good chance rates will be increased, the markets may have got carried away as to how many hikes there will be.

Inflation will remain at the top of the agenda today with the release at 9:30am of the CPI index in the UK. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The pressure is very much on the BOE to prove it can still maintain some level of control over inflation despite what is happening in the commodity markets. The sentiment in the market is that we are reaching a point where the BOE must decide whether to sacrifice economic growth in order to prevent inflation becoming a runaway train.

However with the UK economy predicted to grow just 1.3% next year, King's words will be closely scrutinised by both the market and consumers.

Equities in both London and New York were down on Monday as the further surge in oil prices dented confidence. The FTSE ended the day down 0.14% on the first day of trading following the Chancellor's announcement that new rules were needed to ensure the ‘short selling' of shares was properly regulated.

Wall Street stocks dipped into the red as oil dependent companies and airline stocks took a hit dragging the Dow Jones down 0.3%.

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Inflation Remains Top of Central Banks Agenda.

On Friday morning it was announced that inflation in Germany has accelerated more than initially reported back in May, caused mainly by the price of oil.

The Federal Statistics Office reported that consumer prices increased by 3.1% year-on-year, a 10 basis point increase from an estimate made on May 28th. This could offer further support for the ECB to raise rates sooner rather than later. Later on Friday afternoon the trend of higher inflation continued over in the US.

It was reported that the consumer price index had increased by 0.6% during May, which is the biggest monthly increase since November.

Prices climbed 4.2% in May year-on-year, leading many investors to believe that the Fed will start to raise rates as soon as August. The markets have now priced a total increase of 75 basis points by year end.

Both the ECB and BOE are clearly focused on controlling inflation caused by higher commodity prices. In a somewhat unusual move the bank released the transcript of a speech made by the Executive Director Paul Tucker back on April 28th in which he indicated that policy makers must weigh up the significant inflationary risks from the commodity-price shock against the need to ‘mop-up' after the credit crisis.

In relation to rate expectations in the Euro zone, ECB board member Jose Gonzalez-Paramo added an element of doubt by commenting that, "€œThere is a possibility, not certainty, of a rate increase at our next meeting."

The announcement late last Friday afternoon that 53.4% of voters had voted against the Lisbon treaty will have significant ramifications throughout Europe.

At a two-day summit starting in Brussels this coming Thursday the EU's leaders will seek to outline a plan aimed at averting a full-on crisis, but many including the Irish PM have expressed a belief that on this occasion there is no quick fix.

The Irish vote against the Lisbon treat and slightly less hawkish comments from Gonzalez were the main forces behind the Euro's move lower on Friday. The single currency continued to weaken against the dollar as it traded down to test the 1.53 level but was unable to break below.

This also dragged GBPUSD down to briefly threaten 1.94. The weaker Euro allowed sterling to push back with EURGBP trading through 0.79.

Tuesday will see the release of the UK's Consumer Price Index. If market expectations for a 3.2% y-o-y rise are correct, this will require an open letter from Mervyn King explaining why inflation has risen above 3%.

The minutes from the Bank's meeting earlier this month will be released on Wednesday at 9:30 am. These will be closely scrutinised by market participants for in indication as to the future path of UK interest rates.

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ECB comments dampen the euro

This morning the Euro has weakened against the dollar on the back of ECB comments yesterday that multiple interest rate hikes are unlikely.

In addition, InBev of Belgium's pending acquisition of Anheuser-Busch for $47bn may lend additional support for the dollar as the market anticipates InBev's USD requirement.

In the US, the Fed's beige book survey of data and information reaffirmed the weakening economic conditions stemming from softness in consumer spending, higher food and energy prices.

Corn prices have been on a run, continuing yesterday and giving support for other agricultural commodities. Oil prices continue to rise, moving up more than $5 a barrel yesterday. Globally, stock markets closed lower with the FTSE 100 index falling for its fourth consecutive day of losses.

As the market reassesses the interest rate structure for the euro, sterling has gained a bit of ground. In the UK however, economic data is dire with an increase in unemployment and the trade deficit and average earnings down fueling opinion that recession in the UK is very real possibility.

Economic data to watch for today is US retail sales figures out at 1.30pm and this afternoon Bernanke is speaking again. Tomorrow the G8 finance ministers are meeting in Osaka to reportedly discuss the rise of oil and food prices impact on the global economy.

Last of the most important announcements are the inflation numbers from the US on Friday afternoon. High readings will further support expectations for interest rate hikes from the Fed going forward.

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Oil price continues to strengthen

Global equity markets succumbed to a new sell-off at the end of last week amid jitters among investors over key economic releases and further oil price rises.

The US Labour Department on Friday reported a 0.5% increase in the unemployed American workforce (non Farm payroll) for last month, equating to 49,000 people losing their jobs.

This increase in the unemployment level was last seen in February 1986 and a level last encountered in October 2004.

Morgan Stanley (MS) issued a statement forecasting oil prices to breach the $150/barrel mark by July 4, this sent light sweet oil prices to $139 at the end of last week.

MS believe investors will continue to buy oil to hedge themselves against the foreseeable depreciation of the US dollar. The question is, how much this hedging is pushing the market against speculators pushing this oil price higher?

Closer to home the Bank of England is set to name its chief economist Charles Bean as deputy governor after a long standing dispute between the BOE and the Treasury.

This appears to be good news for Mr King as Mr Bean is his preferred choice of the two candidates.

In Europe it is well known that European central bankers have tended to follow the US Federal Reserve actions. However, comments made by Jean-Claude Trichet, ECB president indicated a misalignment in their interests.

Trichet signalled the ECB’s intentions to take a hawkish stance, by last week stating it was preparing to raise interest rates by 0.25% in July to curb the ever growing inflationary pressures within the Eurozone.

Trichet'€™s statement was soon followed by a 1.3% appreciation in the euro to 1.5749 US Dollars.

Sticking with currencies Sterling fell against the euro this morning which is the fourth consecutive day, dropping to £0.8014/euro. Against the dollar, it dropped to $1.9685, from $1.9708.

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Bernanke talks currencies....

The US Dolar strengthened yesterday afternoon on comments made by Fed Chairman Ben Bernanke.

Breaking with tradition and commenting on currency matters, typically the domain of the Treasury Secretary, Bernanke made clear the US does not want any further USD weakness given the risk this poses to inflation.

Bernanke also commented that interest rates are well positioned to promote growth and stable prices signalling the Fed is done cutting borrowing costs. The dollar rallied 0.2% against sterling and 0.6% against the euro. Oil and gold prices also fell following the comments to $126 and $875 respectively.

Earlier in the day European GDP growth came in stronger than expected at 0.8%, beating analyst forecasts of 0.7% for the first quarter. Investment and construction spending helped the region weather record oil prices and impacts of the stronger Euro.

Annual growth at 2.2% was on par with expectations. Any gains the Euro made were erased by the comments made by Bernanke later in the day.

This morning Nationwide has already released its UK consumer confidence survey which fell to its lowest level since 2004. Cost of living increases and negative housing sentiment continuing to concern consumers.

These are key themes the BOE will be considering ahead of its interest rate announcement tomorrow. The latest Bloomberg economist survey had all 60 polled economists expecting the BOE to leave rates unchanged.

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Inflation and oil the talk of debt consolidation

Inflation and oil continue to be the main focus of the debt consolidation markets.
Yesterday saw the US Dollar gain across the board on the back of oil retreating to as low as $126 at one point. Also supporting the USD was better than expected durable goods orders which declined less then forecasted revealing a surprisingly robust data given the current conditions while weak French consumer confidence weighed on the EUR.

The move in oil has since reversed however with Crude back through $130 a barrel on the back of Nigerian supply concerns.

Moving on to inflation which appears to be the main concern in the markets and whether economies can avoid the nasty Stagflation monster.

The USD has received a boost from comments made by Fed members yesterday. Fisher started last night with stating inflation is the bigger risk to the economy and a concern to all FOMC members.

Other members are also speaking today and it is expected they will reiterate the message of price stability ie controlling inflation. This change in stance, focussing on inflation, from the Fed's initial response to the credit crisis of pumping liquidity into the market and cutting rates has seen the 10yr US Treasury yield rise back above 4% for the first time this year.

Also commenting on inflation was Trichet saying that the job of the central banks is to preserve medium term price stability and keep inflation expectations well anchored. No chance of a rate cut in the Eurozone soon!

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Soros - We face the most serious recession of our lifetime

George Soros, the phenomenally successful billionaire hedge fund manager, has said that "we face the most serious recession of our lifetime".

In short, he made his feeling perfectly clear, by saying that the United States and Britain are facing a recession of a scale greater than the early - 1990s and greater even than the 1970s.

He pointed towards the 1970s dislocations when commenting that current market conditions are worse because of the implications of the house price decline, which there wasn't in the 1970s.

Soros, who warned of the dire consequences facing the American economy years ago, when the housing bubble was still inflating, said about the UK "House prices have risen over the years and are further away from sustainable levels than in practically any other country, in terms of house indebtedness and the relationship incomes. The slump may be more gentle that the US, but it will be more drawn out".

The dollar inched back towards one-month lows against a basket of currencies today, as oil prices were near record highs and the deteriorating U.S. economy.

Activity is expected to pick up today as investors return from long weekends in both the United States and Britain, with the market looking to oil prices and stocks for clues on the dollar's near-term direction.

Expectations of the US dollars longer term direction in particular against the euro, is that we see could it rise towards the end of the year, as Federal Reserve is done with interest-rate reductions and may raise borrowing costs next year.

The U.S. currency on April 22 reached a record low of $1.6019 per euro as the Fed decreased its benchmark rate seven times since September to 2 per-cent to spur economic growth. The dollar has plunged almost 44 percent against the euro since the start of 2002.

The Australian and New Zealand dollars rose on speculation the extra yields offered by the nations' bonds attracted investors. The Australian dollar traded near the highest level in 25 years, whilst the New Zealand dollar climbed for an eighth day, in its longest rally in 14 month.

Crude oil rose above $133 a barrel as a militant attack in Nigeria disrupted supplies and on speculation fuel subsidies in Asian countries will continue to spur demand.

Gold was little changed after gaining in the past two days as higher crude oil prices and the dollar's weakness against the euro bolstered demand for the precious metal as a hedge against inflation.

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Minutes and Oil highlight Fed dilemma

Congratulations to Manchester United and commiserations to Chelsea after a superb European Cup Final in Moscow last night as the Reds invade Red Square.

Another 'close call' at the Federal Reserve who released the minutes of their April 30th meeting yesterday.

Their task in controlling the US economy is not an enviable one. The decision to cut rates at that meeting was certainly not unanimous with members highlighting ongoing inflationary concerns.

Yesterday's latest surge in oil prices hardly helps their cause. Oil surged past the $133 mark fuelled by fears of a global shortage. Policymakers at the Fed are going to find it increasingly hard to weigh up the dual mandate of controlling inflation by hiking interest rates and encouraging spending and growth by cutting them. The minutes showed that the Fed's easing bias is drawing to a close with a more neutral stance to come.

The Bank of England's Money Policy Committee faces the same dilemma. The minutes of this month's meeting showed the 9-strong team voting 8-1 in favour of keeping rates on hold. Blanchflower was the predictable dissenter voting for a cut.

They also showed that there was a general reluctance to cut rates at the moment so as not to be seen specifically targeting growth which could in turn have spooked the market about future implications for inflation.

Many analysts are now targeting November for the next rate cut.

Expect sentiment on this to shift as economic data drips through in the coming months.

The Euro was the winner on the currency markets again which was not only benefiting from uncertainty surrounding future Dollar and Sterling yields but had independent support from the IFO Institute's business climate index which rose to 103.5 in May from 102.4 in April.

The survey signalled that the German economy was showing strong resilience to the US slowdown. The single currency hit one-month highs against Sterling and the Dollar.

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US Dollar falls against euros

The dollar fell to $1.5678 yesterday, the most in a month against the Euro as the price of oil rose above $129 for the first time and speculation increased that the European Central Bank will keep interest rates high.

The rise in the Euro was in spite of a weaker than expected ZEW economic expectation figure out of Germany. Economists expected a gain to minus 37 from minus 40.7 in April; however the gauge declined to minus 41.6.

The Euro is also being buoyed by the continued hawkish nature of the European Central Bank and gained after the head of the ZEW centre and adviser to the German government Wolfgang Franz said "European policy makers may raise interest rates as soon as the financial crisis ends".

Wolfgang, one of the five advisers to the German government told reporters "I would recommend that the ECB keep rates constant until there is clear evidence the financial crisis is over, then the ECB might need to raise rates to take care of inflation". Euro focus today will be on the IFO release for Germany.

Most attention today will be focused on the minutes from the FOMC and BoE. There is market speculation that the minutes from the April 30th FOMC meeting will suggest that the Fed is finished with its most aggressive easing campaign in decades after the 25bps cut down to 2.00%.

However there is still thought to be a considerable difference of opinion between policy makers and the minutes are eagerly anticipated as they ought to provide some sense of whether most members are more worried about the outlook for growth rather than inflation.

Minutes from the BoE meeting on May 8th are released today at 9.30. After late speculation that the bank would opt for another cut after a string of weak data released prior to the meeting, rates were left on hold at 5.00%.
The main focus today will be on the voting split between the members and the discussions that led to the unchanged decision. This should provide an indication of sentiment for the future and what we can expect in the short term.

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Bank of England- between a rock and a hard place.

Today we have the release of the Quarterly Inflation Report accompanied by the post release Question & Answer session.

In a normal market the combined effects of downward pressure on consumption, tumbling consumer confidence, high street sales falling 1.5% year on year, multi million Pound write-downs from the residential property sector, a softening of the holiday booking industry and the threat from the recently nationalised Northern Rock that the labour Government will not get "our" money back for a lot longer would suggest that any inflationary pressures would be subsiding.

Unfortunately that is not the case because inflation is rearing its ugly head. The strong output prices earlier in the week had set the stall and yesterday's CPI number came in at a shocking 3%.

Mervyn & the team must be getting very worried that they will have to write another letter to the Chancellor explaining why inflation is running above 3%.

We would hope that the Bank of England is looking at the bigger picture and the slowing economic environment will drag the inflationary threat lower over time which in turn means there is still the potential for lower interest rates with a Bank Rate of 4.50% still targeted in this cycle.

There was a proliferation of comment from 5 Fed members last night, including the Chairman Ben Bernanke. All followed the same theme of inflation concerns and the need for a stable Dollar, but each with their own nuances.

The most important of these additional comments in my view came from Fisher who stated that the Fed and the ECB were working together to ensure long-term confidence in the Dollar. The implications are that we have seen the top in EUR/USD for the foreseeable future at least (it topped out at just above 1.60 immediately following the last G7 meeting - the significance of which looks more important with each passing session).

The Foreign Exchange markets were reasonably quiet yesterday given the importance of the data and cable traded in a narrow 50 bp range for most of the day with even the much higher than expected UK CPI figure failing to drive it lower.

The Dollar's strength overnight has succeeded in pushing cable down to the 1.94 level but a look at Sterling's performance against other majors underlines the fact that this latest volatility is Dollar based.

The Inflation report at 10.30 followed by the German IFO at 11.00 will be the catalysts that mould the rates early on (a BoE stance as anticipated and a weak IFO could see Euro/GBP lower) and the US CPI data at 1.30 this afternoon will likely be the precursor to further Fed comment and a stronger Dollar later.

We also see UK claimant count rate/ jobless claims/ average earnings/ unemployment rate released. These should provide further evidence of the UK economic slowdown and as such be the Rock to inflation's Hard Place that the MPC finds itself between.

Ensuring that inflation remains a thorn in everyone's side, the oil price continued its inexorable rise reaching a new high above $127 per barrel following rumours of production being reduced. This after the IEA had cut their estimates of global oil demand for the rest of the year.

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Central Banks Keep Rates on Hold .. Oil surges to new record high

Yesterday we saw the MPC decide to keep UK rates at 5% for a further month. Until we get the minutes of the meeting released on the 21st May, we will not know how close a decision this was.

With the current raft of weak data coming from the UK I would imagine there was quite a battle of words between the inflation focused hawks and the doves concerned with sputtering growth.

The ECB also left rates unchanged with their reference rate held at 4% for the 11th month in a row.

The statement from ECB President John Claude Trichet, that immediately followed the meeting left the market in no doubt that the Central Bank's main concern was still very much the fight to stave off inflation.

It looks very unlikely that we will see a move in Euro rates now until well into the second half of the year even though the economic signals from the majority of the member states are getting weaker by the day. German export numbers yesterday underlined this with the strong Euro damaging business outside the region whilst weak demand from within the Eurozone accentuated the problem.

The resultant FX reaction was muted although by the end of the day Sterling did weaken against both USD and Euro.

The outlook on currencies remains clouded with the Market currently making money by being long of Dollars but still unsure that both the US economy is out of the woods and that the US are supportive of a further strengthening in their currency.

Commodities, and especially oil, were the dominant movers yet again with the price of crude going above the $124 per barrel for the first time ever - suddenly, the prediction from Goldman Sachs that oil will reach $200 per barrel this year doesn't look too off the wall.

The resulting economic Global slowdown if this occurs would be severe in the extreme. On the other side, base metals fell in active trading.

Today we are light on the data front with just the US Trade Figures at 1.30 to look forward to. Given the fine weather, this might not prove a strong enough draw to keep the market bubbling into the afternoon.

Next week looks more interesting with the highlight in the UK being the release of the Bank of England's Quarterly Inflation report. The data plus the question and answer session that follows will set the stage for the MPC meeting in June and as such should provide a good clue as to which way the committee will swing.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Bank of England is the focus of Wise Money this week

The lack of Interbank lending is weighing heavily on the price of real money in the market place, as we continue to see disparity between LIBOR rates and BASE rates, with the benchmark 3 month LIBOR fixing at 5.89pct on Friday (against 5.00pct BASE).

The question is how long will this continue and what will the powers that be implement to attempt to bring levels back towards parity? In the current climate investors have the ability to lock in to favourable deposit rates, see levels above.

In home news - The Bank of England is due to announce plans to stimulate lending between banks by effectively taking the under performing assets which are linked to residential mortgages from their balance sheet and swapping them for Gilt edged securities which are effectively backed by the labour Government.

These transactions could carry a haircut of around 20%. There are many associated risks - This will take time to filter through the system and the restoration of confidence will not be immediate, lenders may chose not to pass on reductions in Base rates to home owners while the price of liquidity remains inflated.

Oil prices continue to rise, with record levels posted last week at $117 a barrel. OPEC announced that strengthening demand coupled with the weak US Dollar were pushing prices up. Many now expect oil to go through $120 by the summer.

The stock markets posted small gains last week with the FTSE 100 ending the week up over 200 points higher at 6,056.5

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.

Iran worries continue to push up oil prices

Oil hit 6 month highs yesterday as the developing news story of the week, the capture of 15 British Sailors by Iran, continues to threaten supply. The price of Light Sweet Crude rose to $66 per barrel and Brent Crude to $67 per barrel.

Iran is the world’s 4th largest exporter of oil and although there has not been any disruption to supply as yet, prices are being pushed up as the failure to develop a swift diplomatic conclusion to the situation increases the chances of military conflict.

The issue of oil in relation to the US economy was touched on earlier this week. We mentioned that rising prices, especially as we approach the heaviest period for oil consumption, could have a serious impact on the disposable income of the US consumer.

This could be expected to lead to an easing of inflationary pressures which has been a major concern to Ben Bernanke in recent months. The FOMC is suffering from mixed signals at the moment but if the above scenario occurs at least it can be decisive and act by initiating another phase of interest rate cuts.

However, rising oil prices may force US industry to push up the price of their goods and services which could exacerbate the mixed signals and economic imbalances which has been such a factor of Fed indecision recently.

The Dollar failed to capitalise on an upward revision of Fourth-Quarter GDP yesterday. As the components of the report we’re fully digested any initial gains were unwound.

Negative sentiment continues to surround the Dollar. Today’s major figures, Personal Incoming & Spending for February and Chicago PMI for March, may give traders another reason to sell it off.

In the Eurozone, French unemployment data is expected to show that the country’s high unemployment rate is being addressed. The European Central Bank, hardly mentioned this week, will be looking for continued signs of improvement so that it can continue to tighten monetary policy.

The contents of this blog are for information purposes only. It is not intended as a recommendation to trade or a solicitation for funds. The Wise Money Blog cannot be held responsible for any loss or damages arising from any action taken following consideration of this information.