Daily Insight

The Pound came under some pressure yesterday as the UK Trade Balance showed that the deficit in goods and services actually widened in May, which suggests that UK exports will be unable to fuel economic growth in the second quarter. The gap increased to £6.8 Billion, the biggest increase since February, despite forecasters anticipating that the deficit actually narrowed to £5.7 Billion as surging energy costs and the Pound's dramatic appreciation against the Dollar have a negative impact on UK exports. As a result, Sterling dropped against the Dollar to trade back under 1.8400 on the release of the trade balance and there is some significant data released this morning that could potentially effect the market with the UK unemployment rate and average earnings to the three months to May. Jobless claims probably rose to the highest level in four years, which will help curb wage demands and reduce the pressure on higher inflation as the number of people claiming benefits is likely to rise by upto 5,000 in June to 955,900, the highest since January 2002.

The Euro remained relatively unchanged yesterday, firming 0.1% versus the Dollar amid a quiet day in terms of economic data released. However, the final estimate for euro-zone gross domestic product is released this morning and forecasters are anticipating that the economy grew at rate of 0.6% in the first quarter, which would confirm previous estimates and therefore justify a further tightening of interest rates as the economy continues to accelerate. There has been a host of positive news for the euro-zone economy in the past month with European manufacturing expanding by the most in nearly six years in June and the service sector grew at the fastest pace since 2000. Euro-region unemployment dropped in May to the lowest level since October 2001 and it seems that a rise in interest rates is inevitable when the ECB next convenes on August 3rd.

The market seems to waiting in anticipation ahead of the U.S Trade data released this afternoon as the Dollar was virtually unchanged against the majors at the close last night, hovering around 1.8400 against the Pound and dropping slightly against the Euro. The U.S Trade Deficit is widely expected to widen to $65 Billion in May, the third highest on record, following rising crude oil prices and the level of goods imported from overseas. The shortfall in trade, which many U.S economists blame on the devaluation of the Chinese Wan, will continue to weigh on the economy and threaten economic growth as net capital inflows proved to be insufficient to cover the trade deficit last month. The Dollar is likely to decline against the Pound if the deficit widens by more than forecast in May and similarly, we can expect a positive reaction if the gap in goods and services has narrowed slightly from the previous month.

Data Released 12th July

UK 09:30 Unemployment Rate (June)
UK 09:30 Average Earnings (3 months to May)

EU 10:00 Final GDP (Q1)

U.S 13:30 Trade Balance (May)

written by Adam Solomon