Market Report

The Bank of England, which left interest rates unchanged yesterday at 5.50%, may have to move faster to curb the U.K.'s worst bout of inflation in a decade. The pound headed for a weekly drop against the Dollar and after an initial spike against the Euro has now started to weaken.

U.S. economic growth will gradually pick up through the end of this year, making the Federal Reserve unlikely to cut interest rates before 2008 and allowing the Dollar to strengthen further.

Just like inflation in the U.K Estonia found England impossible to control on Wednesday and with the return of the prodigal son (Mr Beckham) the future seems a little rosier.

Have a great weekend.

VC

Most analysts reckon the Bank of England won't hike interest rates today - but like Steve Mclaren talking up England's chances ahead of a qualifier, market-watchers are wondering how much they actually believe themselves.

Rates won't go up, their argument goes, as it's only a month since the Bank hiked them to a 6 year high. Furthermore, there are 4 rate rises since August already in the pipeline - the deflationary effects of which are still to be felt. The Old Lady of Threadneedle Street will surely ease her foot off the monetary brake for a month at least. Or will she?

After all, analysts were wrongfooted over January's surprise hike. The Monetary Policy Committee (MPC) may, as it turns out, be more hawkish than they bargained for.

We'll find out at noon.

A rise will be Sterling positive yet investors should be cautious as there's already a lot of expectation factored into the price - as well as increased demand due to strong UK equities performance and the fact that the UK already offers the highest interest rate of all the G8 nations.

RL

Yesterday was quite an interesting day with the greenback taking a bit of a pasting across the board. With no major economic data yesterday, it was EUR/USD that led the way breaking levels and moving towards 1.35 and GBP/USD benefiting by default moving towards the bottleneck of 2 once again.

Also yesterday Sterling hit its highest level in almost 15 years versus the yen as investors continued a trend of borrowing in the low yielding Japanese currency to fund purchases of higher return assets in carry trades. GBP/JPY has proved a popular carry trade as Bank of Japan interest rates at just 0.5 percent contrast with expectations that British borrowing costs will rise from their current 5.5 percent later this year.

Thursdays BoE meeting is the major talking point for the market but, before that, at 9.00 figures due out today are on British service sector activity which could indicate whether price pressures are developing in the economy.

The PMI services make up approximately 70% of the UK's economy. This could possible have a damper on sterling should the figure be lower than 57.0.

Have a good one.

DH

Today we have the release of PPI from the Eurozone at 10;00, and at 15:00 US factory good orders. Neither of these are expected to have any major impact, but we look forward to Wednesday when it is widely expected that the ECB will hike interest rates by 25bp to 4%. After the decision, Trichet will make his normal statement in which we look for clues of further rate hikes. It is expected that we will be at 4.25% before the end of the year and even 4.5% in the first quarter of 2008.

Friday saw Non-Farm Payrolls released from the US which came out higher than expected, but surprisingly having very little impact on the markets.

England are playing a crucial game on Wednesday night, which if they fail to win will mean they have next to no hope of reaching the European Championship finals next year.

Lets hope we see a little more excitement in the markets and on the football pitch than we did last week.

Have a good week.

DE

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