Overall confidence in the economy and fundamentals will remain extremely fragile, especially as the government-debt situation remains extremely dangerous. Although there were no fresh measures, the Bank of Japan will maintain an extremely loose monetary policy to support demand which will tend to hurt the yen. Global risk considerations will still have an important impact and the yen will gain support when there is a sharp deterioration in confidence. Nevertheless, the yen will find it difficult to sustain gains given underlying vulnerability and net capital outflows.
The dollar found support on retreats to just below 81 against the yen with a generally weaker yen tone on speculation over merger-related flows out of Japan.
There was still little in the way of enthusiasm for the Japanese economy with sentiment undermined by comments from Bank of Japan Governor Shirakawa that the economy was in a severe state following the earthquake. The economic data reinforced growth fears with a 6.0% monthly decline in the services sector for March and a further sharp GDP contraction for the first quarter.
The US currency retreated following weaker than expected economic data with a retreat to the 81.50 area as US Treasury yields declined on fears over weaker economic activity.
Confidence in the Japanese economy remained very weak and there were strong expectations that the Bank of Japan would maintain a highly-expansionary monetary policy at its latest policy meeting. The central bank held interest rates in the 0.00-0.10% range at the council meeting and decided not to provided any additional stimulus at this time.
Sterling:
The most recent economic data has been mixed with some distortions from seasonal influences, but underlying confidence has remained weak with further concerns that employment fears and weak disposable income will undermine the economy. Despite inflation fears, the Bank of England will find it very difficult o increase interest rates significantly, especially given persistent banking-sector fears and the lack of yield support will tend to undermine Sterling. There will still be protection from alack of confidence in other major currencies unless there is a fresh deterioration in the banking sector.
The latest UK consumer inflation data was much stronger than expected with the headline rate increasing to a three-year high of 4.5% for April from 4.0% previously and compared with expectations of a 4.2% rate. The core rate also increased to 3.7% for the month and Sterling spiked higher following the release with a peak just above 1.63 against the dollar, but Sterling was generally fragile.
Bank of England Governor King was forced to write another letter to explain why the inflation rate remained outside a 1-3% range and King maintained that the rate was liable to increase further in the near term. He also stated that it would be a mistake to seek to bring inflation down too quickly as this would risk triggering a substantial deterioration in economic conditions.
There was a larger than expected increase in the jobless claimant count of over 12,000 for April, although the ILO unemployment rate actually declined. The data overall maintained unease over the level of demand within the economy.
The Bank of England minutes recorded a further 6-3 vote in favour of unchanged interest rates at the May meeting. Sentence continued to his campaign for a 0.5% increase with Weale and Dale also calling for rates to be increased by 0.25%.
The headline retail sales data was stronger than expected with an increase of 1.1% for April compared with a consensus forecast of a 0.8% gain. There was also an encouraging CBI manufacturing survey. Nevertheless, underlying confidence in the economy remained weak with expectations that the rebound in spending would not be sustained given the underlying downward pressure on real incomes.
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