Daily Insight

The recent positive sentiment surrounding the Pound can be attributed to speculation that the Bank of England may finally be ready to shift monetary policy for the first time in almost a year. There was some significant data released in the UK yesterday that reaffirmed those suggestions with Retail Sales rising by twice as much as expected in June with sales increasing by 0.9% from May, which has prompted investors to raise their bets on a rise in rates over the coming months. Retail Sales accounts for two thirds of consumer spending, which has helped drive economic growth this year as the UK economy continues to expand into the third quarter while inflation also accelerates beyond the government's comfort zone. Therefore, a further tightening of monetary policy seems inevitable and the Pound has been gaining on the news, firming 0.4% against the Dollar to close around 1.8500 last night. Sterling could make further gains this morning with the initial estimate for UK Gross Domestic Product in the second quarter and it is widely expected to show a quarterly increase of 0.7%, which would mean the annual growth rate has increased from 2.3% to 2.5%. Therefore, UK economic growth will maintain the fastest pace in two years going into the third quarter as a pick-up in consumer spending combined with sustained growth in the manufacturing and services sector signals the need for higher interest rates.

Without any significant data released in Europe or the States today, we expect the markets to be fairly quiet with attention switching to the ongoing conflict in the Middle East. The Euro has been under increased pressure since the fighting began in Lebanon but there has been some positive data released in the past 24hrs with Italian Consumer Confidence rising to a four month high in July while French consumer spending increased to a one-year high as both countries reached the final of the World Cup, which has evidently boosted sales.

The Dollar has been in retreat in the past 48hrs, particularly since Ben Bernanke addressed the Senate Banking Committee on monetary policy where it now seems likely that the Federal Reserve will hold interest rates around 5.50% following one more rise next month as economic growth begins to slow in the second half of the year. As a result, the Dollar declined against the majors and we saw further weakness yesterday despite the better than expected jobless report where initial claims over the last week dropped significantly to 304,000. In addition, an index of U.S leading economic indicators rose for the first time in three months in June as strong consumer confidence and a seemingly buoyant labour market will keep the economy on track. However, factory output in the Philadelphia region slowed dramatically in July with the Philly Fed Index dropping to 6.0 from 13.1 in June, which is lowest reading since January this year. Elsewhere, the minutes of the Federal Reserve's June policy meeting were released last night and portrayed a level of uncertainty with regard the future tightening of interest rates but it seems the majority of policy makers believe that U.S inflation will gradually "edge down".

Data Released 21st July

UK 09:30 GDP (Q2 Prelim)

written by Adam Solomon