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The pound sunk over a 150 pips to below 1.5160 by the dour BoE quarterly inflation report, as the central bank painted a dismal picture of tight credit markets and depressed prices until 2012. Indeed, Governor Meryn King stated that expectations are that inflation will remain below their 2% target until 2012 as the economy is looking at a relatively slow recovery.

Talking Points
• Japanese Yen: Testing 96.00
• Pound: Sunk By Dismal Quarterly Inflation Report
• Euro: Industrial Production Falls To Record Low
• US Dollar: Advance Retail Sales on Tap

Pound Sunk As BoE Sees Inflation Below Target Until 2012 As Tight Credit Markets To Slow Economic Recovery

The pound sunk over a 150 pips to below 1.5160 by the dour BoE quarterly inflation report, as the central bank painted a dismal picture of tight credit markets and depressed prices until 2012. Indeed, Governor Meryn King stated that expectations are that inflation will remain below their 2% target until 2012 as the economy is looking at a relatively slow recovery. The report has completely reversed recent bullish sentiment that was building on improving fundamental data.

Yesterday, the U.K. economy showed that the declines in industrial production and the labor market were slowing as both releases significantly beast estimates. The labor report which was due for release today was leaked yesterday morning and showed that the number of jobless claims rose by 57.1K versus expectations of 85.0K. However, the unemployment rate rising to 7.1% from 6.7% was a cause for concern. Also, the early release of NIESR GDP estimate saw last month's contraction revised to -1.7% from 1.5%, which was the reading for April. Although, we saw an improvement, it was from a worse than previously thought level which also caused concern. Despite, the central bank's quantitative easing measures it still expects lending to take a long time to resume which has lowered their expectations for future growth. Therefore, we could see the pound continue to trade heavy until we see a significant improvement in the fundamental data.

The euro has been for the most part range bound between 1.3650 and 1.3725 during overnight trading despite a dour industrial production report before the BoE report dragged it lower. Indeed, activity in the region fell 2.0% in March which pulled the annualized reading down by 20.2% -the lowest on record. Intermediate goods and energy products led the way with 3.1% and 2.8% declines respectively. A sign that consumers are continuing to put off larger purchases in the face of the current recession was a 2.5% drop in durable consumer goods. The ECB recent announcement of quantitative easing measures may be little too late as we are seeing the U.K. looking at tight credit markets going forward and the BoE is considered ahead of the curve. Additionally, committee member Axel Weber was on the wires yesterday stating that there was no need to purchase more debt which shows that there is still division over the future course of action for the central bank.

The dollar has regained its footing after a brief sell off during Asian trading after a FT article reported that the United States could lose its AAA credit rating. This has been something that has been on traders' minds with the government continuing to bail out troubled companies, print money and increase its deficit. The focus today will turn to today's Advance Retail Sales which is expected to show consumption in April remained flat following a 1.2% drop the month prior. The U.S. consumer has become increasingly optimistic evidenced by the rise in the University of Michigan consumer sentiment reading to 65.1 from 61.9 which could translate into an increase in spending. There is a lot of built up demand and we may start to see it flow through over the next few months. Looking at last month's breakdown we see evidence of this as electronic and apparel sales fell 5.9% and 1.8%. These are volatile sectors and sharp falls are typically followed by a rebound. Indeed, the last two times demand for electronic goods fell by more than 5% the following month saw at least a 7% rebound. Therefore, a improvement in domestic demand would add to increasing optimism and weigh on the dollar.

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To discuss this report contact John Rivera Currency Analyst: jrivera@fxcm.com