UK inflation rate hits negative territory

Last week saw the UK inflation rate drop into negative territory – the first time this has happened in 50 years, the repercussions of which would mean that it is then more likely that we see a rate rise next year rather. Things weren’t all dire as it did emerge via BoE minutes that the inflation rate should be higher by year end, boosting GBP. Retail sale also came in strong for the UK, pushing the pound upwards and breaking 1.40 (interbank) against EUR. We won’t see much data action from the UK this week aside from GDP on Thursday which is expected to show an increase for both year-on-year and month-on-month.

EUR saw some strengthening last week off the back of it meeting debt repayment obligations to the IMF – the worry now is that it might not make the 5 June deadline however. There is also still some disagreements between Germany and Greece as to how the debt issue is to be managed which might hamper next week’s deadline as well. EUR weakness last week came, however, by way of poorer PMI numbers from Germany and the Eurozone. It’s a quieter week as well for the commonality with the only real data to chew on being German retail sales on Friday. The lead up to next week’s IMF repayment for Greece might also present some issues – time will tell.

The dollar also saw its chances of a rate rise reduced with poorer economic data coming in. The flipside was the highest number of housing starts for 7.5 years which aided USD strength a bit. The Fed did, however, state that the US economy is not yet ready for a rate rise – so this looks likely to be pushed back but as always, it’s all a guess right now as to when. The main focus this week will be the release of Q1 GDP numbers – a drop of 0.2% - 0.8% is expected so there is likely to be drop for USD.