London Session

Sterling has suffered heightened volatility this morning both before and after the publication of the BoE's Quarterly Inflation Report. The Bank's governor King has used this morning's press conference to make clear that that this could be a protracted recession. While King stated that there are solid reasons for supposing there will be an economic recovery in the next 12 months, he warned that it may take longer than usual to return to a normal path of growth. What has surprised markets in particular is that the Bank's fan chart of GDP projections included the risk that growth could reach as low as 6% this year – worse than the market was forecasting.
References made to the pound by King include the comment that its present weak tone will help support an economic turnaround. Once again, there has been no sign that the Bank of England is concerned by the weak pound. Having recovered to EUR/USD0.894 mid-morning EUR/GBP has bounced to the 0.900 resistance level. Cable had earlier found buyers in the 1.5250 area. However, the move lower on the Inflation Report was swift, with cable falling all the way back from 1.5330 to 1.5150. Today's fall in sterling is likely to ensure that it remains sensitive to good news. However, while the pound is frequently referred to as cheap, in view of the vulnerable economic backdrop in the UK, any long-term recovery in the pound is likely to be choppy.

The USD has won back some ground vs the EUR during the course of the European morning. Overnight the USD had been hit by negative press reports. The first revisited the risk that the US could face a downgrade in its triple A rating, another highlighted comments from Japan's opposition party that they would only continue to buy US bonds if they were JPY denominated. The latter story can be put to one side given the opposition are not likely to have the opportunity to form a gov't in the foreseeable future. EUR/USD looks to be headed back to technical support in the 1.3620 area.

USD/JPY has been on a bear trend since the end of the Golden Week holiday. This has been consistent will this week's less confident outlook with respect to risk. Having broken through the USD/JPY96.40 trendline, 96.00 should offer support, though a break through here could target a move back down to 95.00 and below.

This afternoon, the release of the US retail sales report for April will be key. The market is expecting a figure of -0.1% m.m. Decent data can be expected to strengthen the risk trade and thus undermine the USD .

Upcoming Economic Data Releases (US Session). Prior, Expected