Daily Insight

There was a real mixed bag of UK data released yesterday and as a result, the Pound dropped by 0.4% versus the Dollar at the close last night to trade in and around 1.8400. Firstly, the Producer Price Index came out slightly under expectations with output prices accelerating by 0.1% in June, which takes the annual growth rate to 3.3% while input prices slowed to 10.9% from May, which was considerably lower than expected and goes some way to dampen suggestions that rising UK inflation will need to be contained. Therefore, the likelihood of a rise in UK interest rates next month has been severely muted and that sentiment was further emphasised in the BRC retail sales survey for June, which showed that the pace of consumer spending has slowed considerably in the second quarter. Elsewhere, UK house prices will remain at an elevated level as the ODPM house price survey showed this morning with prices jumping to 5.6% in May, which was well above expectations. There is some significant UK data released this morning with the global trade balance and forecasters are anticipating that the deficit narrowed slightly in May from £5.75 billion the previous month as the increase in euro-zone domestic demand will continue to help support UK export growth in the coming months.

The Euro remained relatively unchanged against the Pound yesterday, hovering around 1.4450 for the most part of the day following the release of some poor European data, which showed that German exports declined significantly in May while imports also slipped 2.6%. This will fuel speculation that the Euro's 8% appreciation against the Dollar this year is beginning to wane of euro-zone exports as investors look elsewhere for cheaper alternatives. In addition, European Finance Ministers convened yesterday to discuss economic growth in the euro-zone and gave a clear indication that a further tightening of interest rates will be needed as faster growth fuels the risk of higher inflation. There is a sparse supply of economic data released in the Euro-zone until the Final GDP estimate tomorrow but we could see some market movement over the course of the day as the chairman of the ECB, Jean-Claude Trichet, may give some hints towards future monetary policy in a speech later this morning.

The market seemed to consolidate yesterday as the Dollar retraced most of the losses from Friday's poor U.S job report, which showed that the economy had added much fewer jobs than expected in June and therefore went some way to justify the Fed's intention to hold interest rates next month. However, although Nonfarm Payrolls was considerably worse than anticipated, the U.S unemployment rate is still at a five-year low at 4.6% and household earnings has accelerated to a five-year high, which both provide a strong case for inflation ahead. There was some significant data released in the States yesterday with Wholesale Inventories coming out ahead of market expectations at 0.8% in May, which gives an indication that producer and consumer interest is still advancing in the second half of the year despite higher petrol prices and rising interest rates.

Data Released 11th July

UK 09:30 Global Trade Balance (May)
- Ex EU

written by Adam Solomon