Daily Insight

Following on from last week, the Pound has strengthened to the highest levels against the Dollar and the Euro this year after the Bank of England unexpectedly raised UK interest rates by 25 basis points for the first time since last July. According to many investors, there was only a 15 per cent that rates would go up this month but following higher inflation, rising energy costs and faster economic growth, the MPC decided to lift interest rates to 4.75%. However, by no means are we entering a prolonged cycle of monetary tightening and last week's move by the BoE will be seen as purely a measure to calm inflation. Nevertheless, the Pound has rallied furiously towards the end of last week to trade above 1.4800 versus the Euro and break the 1.9000 barrier against the Dollar. There is a host of significant UK data released this week but following the surprise decision to lift rates, the BoE's quarterly inflation report on Wednesday will take on added significance as investor's attempt to gauge why the Central Bank chose to raise interest rates this month. The focus today will fall on UK industrial production for June with forecasters anticipating that the recent revival in the manufacturing sector will reflect the previous CBI and PMI surveys. Manufacturing output is expected to increase by 0.2% from the previous month while production may stay unchanged, showing growth at 0.3%.

The Euro continued to decline against the Pound towards the end of last week despite the ECB lifting interest rates for the fourth time this year as economic activity in the Euro-zone continues to accelerate. In the accompanying press conference, the chairman of the ECB, Jean-Claude Trichet, said a further tightening of monetary policy may be 'warranted' in the coming months but crucially, he dropped the term 'vigilant from the statement, a word the market has come to associate with a further rise in rates in the near short-term. There is a sparse supply of economic data released in the Euro-zone this week with the focus falling on the ECB monthly bulletin on Wednesday. It is widely expected that the bulletin will mirror the tone of the press conference last week while elsewhere, there is some significant inflation data released in France and Italy, which will provide an indication of the strength of the Euro-zone economy.

Following on from Friday, the Dollar has come under intense pressure after the monthly U.S job report showed that the economy added fewer jobs than expected in July and the unemployment increased to 4.8%, which has severely dented expectations that the Federal Reserve will continuing raising interest rates this week. Nonfarm Payrolls on Friday showed that the economy added just 113,000 jobs last month against expectations of an increase of 150,000 while the average hourly earnings remained unchanged. Therefore, investor's trimmed their bets of an August rate rise, factoring in only a 20% chance that the Fed will raise rates above the current 5.25% for the eighteenth consecutive month. In addition to the FOMC rate announcement tomorrow evening, there is a host of significant data released in the States with the focus falling on the monthly U.S trade balance and Retail sales data for July. The Dollar may decline further against the Pound after breaking the resistance at 1.9000 last week and forecasters are anticipating that the deficit in goods and services actually widened in July, showing a modest increase to $64 billion.

Data Released 7th August

UK 09:30 Industrial Production (June)
- Manufacturing Output

U.S 20:00 Consumer Credit (June)

written by Adam Solomon