Daily Insight

Yesterday represented a significant day of events in Europe and the market has reacted to the news in a manner, which we anticipated in yesterday's morning update. The European Central Bank met in Madrid at midday and elected to lift interest rates by 25 basis points to take their benchmark rate to 2.75%. However, in the past couple of weeks the market has been pricing in a 20% chance that policy makers would lift rates by as much as 50 basis points, which would be the single biggest move in over six years. Therefore, the Euro fell sharply in the aftermath of the announcement and the bearish mood continued in the ensuing press conference where ECB chairman, Jean-Claude Trichet, indicated that euro-zone interest rates are still "low" but the choice of language used when describing the threat of inflation was less aggressive in his statement, leading to speculation that the ECB won't raise rates further in July. As a result, the Euro dropped 0.4% against Sterling to close above 1.4550 last night and there is some significant data released this morning in the euro-zone with German industrial production set to remain unchanged at a 2.4% growth rate in April.

The Bank of England announced yesterday that UK interest rates would remain unchanged at 4.50% for the tenth month running as policy makers continue to adopt a cautious approach in the tightening of monetary policy despite a recent pickup in manufacturing and service sector. Economic growth looked to be accelerating in the second quarter but it seems that the MPC are at this point unconcerned over the threat of rising inflation. The minutes of yesterday's policy meeting will be released on the 21st June where we will get an indication of how the eight-strong committee voted with David Walton the only member to recommend a rise in UK interest rates last month. The focal point today in terms of data released will be the Global Trade Balance with forecasters anticipating that the deficit has widened to £5.9 billion. There was some data released in the UK yesterday with the CIPS index for factory output expanding for a tenth month in April, rising 0.2% after a 0.7% jump in March, which was the biggest gain in seven months.

The recent resurgence of the U.S dollar continued for a fourth day running yesterday, firming 0.6% against Sterling to record new lows under 1.8400 after speculation intensified that the Federal Reserve will need to lift borrowing costs for a 17th consecutive month in June after the chairman, Ben Bernanke, said inflation was "unwelcome" and the Fed would make sure that is was "not sustained". In addition, the Dollar was given another timely boost yesterday after U.S wholesale inventories rose by more than forecast in April, jumping 0.9% despite expectations of a modest gain of 0.5%. This emphasises the comments from Alan Greenspan earlier this week where he stated that U.S productivity would outweigh the threat of rising global energy costs. There is some significant data released this afternoon in the States with the monthly Trade Balance expected to show that the deficit has widened to $65 billion in April after a significant rise in U.S import prices.

Data released 9th June

UK 09:30 Global Trade Balance (April)

GER 11:00 Industrial Production (April)

U.S 13:30 Trade Balance (April)

U.S 13:30 Export Prices (May)
- Import Prices

written by Adam Solomon