Daily Insight

The Pound received an unexpected boost yesterday ahead of the Bank of England rate announcement this Thursday with growth in UK Manufacturing exceeding expectations. The Purchasing managers index surged to 55.1 in the figures released for June with input and output prices also increasing last month, which will only add to concerns that inflation is continuing to accelerate beyond the government’s 2.0% target. The MPC are widely expected to keep interest rates on hold at 4.50% for the eleventh month in succession but pressure is building for the BoE to tighten rates if rising inflation continues to threaten economic growth.

The Euro made significant gains against the Pound and also remained firm against the Dollar yesterday as European manufacturing expanded at the fastest pace in six years, providing yet more evidence of a strengthening economy following the sustained growth in the Ifo business confidence index last week. It seems that the threat of global inflation and higher energy costs are thus far having little effect on European economic expansion, which has led to further suggestions that the ECB will need to quicken the pace of interest rate rises. However, despite many members of the Central bank giving their backing to such a move, the chairman, Jean-Claude Trichet, has resisted publicly giving his support to a more aggressive tightening of policy and therefore we expect the ECB to hold their benchmark interest rate at 2.75% in the announcement this Thursday. There is some significant data released this morning in the euro-zone that is likely to add to the calls for higher interest rates with the May Producer Price Index expected to show that prices increased by 0.3% from April. Elsewhere, the euro-zone unemployment rate is widely expected to remain unchanged at 8.0% in May.

We can expect a relatively quiet day today as the U.S celebrates their 4th July holiday, which means that there isn’t any data released in States until Wednesday. The Dollar has been reeling in recent days following the statement from the Fed last week, which wasn’t as vigilant on inflation as many investors were anticipating and therefore expectations for an August rate rise have been severely muted. The Dollar came under further pressure yesterday against the Euro amid some disappointing manufacturing data where the ISM index posted an unexpected drop for a second month in June as companies curb expansion in the face of rising energy costs.

Data Released 4th July

EU 10:00 Producer Price Index (May)
EU 10:00 Unemployment Rate (May)

written by Adam Solomon