In other news the Bank of England’s (BoE) inflation report contributed to pressure on the GBP as the Forex market reduced its interest rate expectations. The BoE expects inflation to drop below the desired 2% annual CPI over the next 12 months. The GBP fell briefly as the inflation report was released, but quickly recovered to stabilize about 1.95.

Attention will soon turn to the USD as Forex Investors await Federal Reserve chairman Ben Bernanke’s testimony to Congress, which is expected to cause further weakness to the dollar. The Forex market is expecting Bernanke to suggest that inflation is stabilizing on recent news of retail sales only showing modest gains.

The Euro fell to 1.2637 dollars in early European trading from 1.2659 dollars late on Wednesday in New York.

The USD climbed to 115.14 yen from 114.86 yen on Wednesday.

In Asian trading, the USD had extended losses ignited Wednesday after European Central Bank chief Jean-Claude Trichet raised expectations for further rate increases in the eurozone.

Despite a slight rebound, “the dollar remains under selling pressure against the euro, pound and Swiss franc”, said Derek Halpenny, senior currency economist at The Bank of Tokyo-Mitsubishi in London.

However the US currency remains stable against the yen as speculation grows of a Japanese rate hike in July, he added.

Meanwhile sterling fell against rivals after David Walton, the only Bank of England policymaker to call for an increase in British interest rates earlier this month, died suddenly late Wednesday.

“It is with great sadness that the Bank of England has learnt that David Walton, an external member of the Monetary Policy Committee, died yesterday evening, unexpectedly and after a short illness,” the central bank said in a statement. Walton was 43.

The Bank of England’s rate-setting MPC voted 7-1 to keep British borrowing costs at 4.50 percent, minutes of the June 8 meeting showed on Wednesday. It was the tenth month in a row that the BoE froze its key “repo” rate — the rate at which the central bank lends to commercial banks.

The market meanwhile turned cautious on the yen, which had risen earlier this week as Bank of Japan governor Toshihiko Fukui sparked fresh speculation of an end to the central bank’s unconventional zero-interest rate policy.

The euro was changing hands at 1.2637 dollars against 1.2659 on Wednesday, 145.50 yen (144.74), 0.6871 pounds (0.6838) and 1.5635 Swiss francs (1.5593).

The dollar stood at 115.14 yen (114.86) and 1.2370 Swiss francs (1.2355).

The pound was being traded at 1.8393 dollars (1.8456).

SOUCE: AFP

May’s figure breached the Bank of England’s government-set target of 2.0 percent — and was the highest reading since October 2005 when it stood at 2.3 percent.

On a month-on-month basis, the consumer price index climbed by 0.5 percent in May compared with 0.6 percent in April, according to Britain’s Office for National Statistics (ONS).

Both inflation numbers were in line with analysts’ consensus forecasts.

Upward pressure came from soaring domestic gas and electricity bills, which have soared over the past year owing to increased wholesale energy costs.

The surging cost of crude oil also fed through into rising petrol or gasoline prices, the ONS added.

The Bank of England had predicted last month that soaring oil prices would help push 12-month inflation above the government-set 2.0-percent target in the next two years, before dropping back to around target.

That had fuelled market expectations that it was gearing up for a rate hike at some stage this year.

Last Thursday the central bank froze its key interest rate at 4.50 percent for the tenth month in a row, maintaining a wait-and-see policy over the economy.

The decision was set against a backdrop of tumbling global stock markets and investor concerns that Europe and the United States would face fresh rate hikes after three years of favorable credit conditions.

SOURCE: AFP

The decision-making body of the BoE, the Monetary Policy Committee (MPC), will likely freeze the “repo” rate, at which the central bank lends to commercial banks, according to a poll of 35 forecasters by AFP’s financial news service AFX News.
However, economists are speculating that the cost of borrowing could rise as soon as August to keep inflation in check.

The MPC, starting two-day deliberations on Wednesday, had warned last month that inflation would overstep its key 2.0-percent inflation target within two years if the cost of borrowing remained at the current level.

“No change is widely expected on Thursday, but on balance we still think the Bank will hike rates in August to 4.75 percent,” said Investec Securities economist Philip Shaw.
In May’s quarterly Inflation Report, the BoE had predicted that soaring oil prices would help push 12-month inflation above the government-set 2.0-percent target in the near-term, before dropping back to around target.

That fuelled expectations that the MPC was gearing up for a rate hike some time this year.
British 12-month inflation rose to 2.0 percent in April from 1.8 percent in March, lifted by an increase in air fares and rising domestic gas and electricity bills.
Other recent developments would also affect the rate-setting body’s decision this month, according to HSBC economist John Butler.

“Since the Inflation Report, the key developments have been a sharp drop in equity prices and a 3.0-percent rise in trade-weighted sterling,” Butler said.
“Both moves should dampen the committee’s fear of inflation and, hence, keep the MPC on hold.”

Last month the bank froze the cost of borrowing in Britain at 4.50 percent in May for the ninth month in a row against a backdrop of steady economic growth.
The MPC was split three ways in May’s interest rate vote for the first time for nearly eight years, minutes from the meeting showed.
Six MPC members, including BoE governor Mervyn King, had voted to keep interest rates unchanged at 4.50 percent, while David Walton voted for a quarter-point rise and Steve Nickell, in his final meeting, called for a quarter-point cut.

Following the departure of Nickell — who has voted for a cut on six consecutive occasions — the MPC now has a bias towards monetary tightening, according to HSBC’s Butler.
Nickell is being replaced on the Committee by David Blanchflower, professor of economics at Dartmouth College in the United States, who has run into controversy with his plan to split his time between the Britain and America.

The vote in May marked the first time the committee had split three ways since August 1998, and was only the third time since the bank was granted its independence by Britain’s Labour government in 1997.

The MPC has been reduced to eight members for its April, May and June meetings, after senior member Richard Lambert left his post ahead of becoming the new boss of employers’ body the Confederation of British Industry.

SOURCE: AFP