Daily Insight

The Pound continued to make further gains against the Dollar yesterday and rose to an eight month high versus the Euro despite weaker than expected industrial production data as output increased by just 0.1% in June, which was much lower than forecast and a significant drop from May. The robust growth in the manufacturing sector was one of the primary reasons in the Bank of England's decision to lift UK interest rates last week but it seems that rising raw material costs and surging energy prices are have a damaging effect on factory production despite faster economic growth lending a boost to export demand. Nevertheless, the Pound remained relatively unchanged on the release of the data and made further gains throughout the course of the day to firm 0.2% against the Euro and a further 0.1% versus the Dollar. There is some significant UK data released this morning with the BRC retail sales survey widely expected to show a modest decline in the figures for July as soaring temperatures may have kept consumers away from the shops. In addition, a report from the National Institute of economic and social research showed that the UK economy supposedly grew at 0.8% in the three months through July, which was slightly faster growth than the previous 3 months. The Bank of England's quarterly inflation report, due tomorrow, will therefore take on added significance and investor's are speculating that the report will help rein in UK interest rate expectations.

There was a sparse supply of economic data released in the Euro-zone yesterday and that theme will continue for the majority of this week. The ECB also raised interest rates last week and signalled that a further tightening of monetary policy may be warranted in the coming months. The Central Bank's monthly bulletin is due tomorrow and it is widely expected to reiterate the hawkish tone from the press conference last week. In addition, there is some inflation data released on Friday with the final estimates for second quarter GDP in the big three euro-zone economies and if economic growth continues to accelerate throughout the Euro-zone, speculation will intensify that the ECB will need to continue raising interest rates from the current 3.0%.

Without doubt, the focus today will fall on the FOMC rate announcement this evening where it is widely anticipated that the Federal Reserve will hold U.S interest rates for the first time in 18-months. Following a significant slowdown in economic activity and the recent rise in the unemployment rate, the Fed may be given scope to pause at 5.25% but recent comments from several Fed policy makers have left the decision in the balance. The outcome of the announcement will determine the Dollar's next move with investor's pricing in only a 20% chance that the Fed will hike today but as we found out last week with the Bank of England, there is still a chance that U.S interest rates may rise once more. In addition to the rate announcement, there is some significant data released in the States today, which may provide direction ahead of the Fed's decision. Unit labour costs in the second quarter are widely anticipated to show robust gains in the data released this afternoon, rising to 3.5% from 1.6% in the first quarter.

Data Released 8th August

UK 11:00 BRC Retail Sales Survey (July)

GER 11:00 Industrial Production

U.S 13:30 Unit Labour Costs (Q2)
U.S 13:30 Non Farm Productivity (Q2)
U.S 19:15 FOMC Rate Announcement

written by Adam Solomon