Daily Insight

The Pound remained relatively unchanged yesterday after the Bank of England announced that UK interest rates would remain on hold at 4.50% for the eleventh month in succession in July and we will have to wait until next week to gauge how the seven strong committee voted. It was widely anticipated that UK rates would remain on hold this month but pressure is mounting for the central bank to change monetary policy in the face of rising inflation and higher energy costs. This was emphasised in the economic data released yesterday where UK industrial production increased by more than expected in May, jumping by 0.5% with manufacturing output also showing signs of growth from April. Elsewhere, the Halifax House Price survey showed that UK prices has declined by the most in two years in the index released yesterday, which has revived speculation that the property market is beginning to decline.

The ECB also elected to hold interest rates at 2.75% this month, despite several members of the governing council publicly declaring the need to quicken the pace of interest rate rises as the economy accelerates faster than anticipated. In the accompanying press conference, the chairman, Jean-Claude Trichet, reiterated that the economic data in the euro-zone continues to show signs of improvement and "conditions are in place for growth to stay near potential". However, Trichet also stated that the ECB would remain vigilant on inflation and used the exact same terminology that he used in the statement prior to the December rate rise last year. Therefore, it now looks increasingly likely that the ECB will lift interest rates on the 3rd August but the market has looked fairly quiet since the announcement, which leads me to believe that a hike in rates next month was already factored into the market as we continue to hold around 1.4400 against Sterling. Elsewhere, German factory orders fell significantly in May with orders declining by 1.2% from April, which is an indication that the Euro's dramatic appreciation against the Dollar this year is beginning to have a negative impact on euro-zone exports. This may have a bearing on future monetary policy as the ECB becomes concerned that the Euro's 8% appreciation against the Dollar this year will begin to wane on exports and therefore widen the trade deficit.

The Dollar has bounced back in the past 48hrs amid the release of the ADP employment report, which showed that the economy had added a phenomenal amount of jobs in the past month. However, there has been some significant data released this afternoon in the States, which showed that U.S Service Industries grew at a much slower pace than previously expected, led by a dramatic 'cooling' of the housing market in the second quarter. The ISM non-manufacturing index actually dropped to 57.0 from 60.1 in May and as a result the Dollar momentarily dropped back towards 1.8400 against Sterling, although we closed well under this level. There is some hugely significant data released this afternoon with U.S Nonfarm payrolls set to show that the economy added in excess of 150,000 jobs in June with the Average Earnings rising 0.3% and the unemployment rate is widely expected to remain unchanged at 4.6%. If the monthly job report shows a bigger improvement in the labour market than anticipated, we can expect the Dollar to strengthen further against the Pound.

Data Released 6th July

GER 11:00 Industrial Production (May)

U.S 13:00 Nonfarm Payrolls (June)
- Average Hourly Earnings
- Unemployment Rate

written by Adam Solomon