Daily Insight

Amid the continued turmoil in the Middle East, the U.S Dollar has made significant gains against the majors, firming to the highest levels against the Euro since mid April as speculation has intensified that the Federal Reserve will need to carry on raising interest rates in order to keep inflation in check. However, the Dollar's two week rally came to a dramatic end yesterday, dropping over a point against the Pound to close around 1.8400 as the Fed chairman, Ben Bernanke, delivered his first semi-annual monetary policy report to the Senate Banking Committee. In his testimony, Bernanke focused on inflation and slowing economic growth saying, "moderation in growth would limit inflationary pressures over time". The chairman also highlighted that long-term inflation pressure had slowed somewhat, largely as a result of seventeen consecutive interest rates rises over the past two years.

Therefore, it now looks increasingly likely that the Fed will hold interest rates in the coming months although investor's are still factoring in a further hike in U.S rates in August. There was also some significant data released in the States yesterday with the Consumer Price Index showing an increase in prices for the sixth month running in June with costs excluding food and fuel rising by more than forecast. The Dollar may come under further pressure this afternoon as the weekly jobless report may show a further decline in the U.S labour market after recording 332,000 claims last week while elsewhere, the Philly Fed Index is expected to drop significantly in the figures for July.

The Pound has enjoyed a decent rally over the past two weeks and we saw further gains against the Dollar and the Euro yesterday despite the release of the minutes from the Bank of England's last policy meeting. The MPC voted unanimously 7-0 in favour of keeping UK interest rates on hold at 4.50% but as a result of a string of positive economic data released in the past month, the Pound has been gaining on speculation that the BoE will need to lift rates at some point this year as core inflation accelerates to 2.5%. There is some significant data released this morning in the UK, which could push Sterling back above yesterday's four week high against the Euro with Retail Sales widely expected to show an increase of 0.2% in June.

The Euro has declined significantly against Sterling and the Dollar in the past few weeks, primarily due to the continued unrest in the Middle East but it can also be argued that a string of negative data has shifted interest rate expectations in the Euro-zone over the coming months. The ECB are widely expected to lift rates to 3% next month but concerns are growing that a further tightening of monetary policy will result in slowing economic growth. However, there was some strong inflation data released in Germany yesterday with the Producer Price Index accelerating by more than anticipated in June as the cost of energy and raw materials increased.
Data Released 20th July

UK 09:30 Retail Sales (June)

U.S 13:30 Initial Jobless Claims (w/e 15th July)
U.S 15:00 Leading Indicators (June)
U.S 17:00 Philly Fed Index (July)
U.S 19:00 FOMC Minutes 28/29 June Meeting

written by Adam Solomon