Daily Insight

The Dollar came under increased pressure yesterday amid the release of some soft consumer sentiment data, which showed that confidence in the U.S had dropped to a nine-month low in August following a dramatic slowdown in the housing market and concerns over rising energy prices that in turn have a negative impact on job prospects as employers attempt to curb spending. The index fell by more than expected this month to a reading of 99.6 from 107.0 in July, the biggest single decline since the devastation caused by Hurricane Katrina last year. However, the Dollar reacted curiously against the Pound, strengthening towards 1.8900 as the survey also pointed to higher inflation concerns among the American consumer. Inflation expectations over the next year rose to 5.5%, up from 5.1% last month and the gauge will prompt speculation that the Federal Reserve may raise interest rates once more before the turn of the year. Although, the relative appetite for the Dollar was short-lived as the minutes from the Fed's last policy meeting were released yesterday evening, signalling that a further tightening of monetary policy was unlikely this year as the slowdown in economic growth eases inflation. In addition, Fed policy makers also suggested that the current lending rate of 5.25% was "consistent with satisfactory economic performance", which indicates a further rise in interest rates could 'over-heat' the economy.

There is some significant economic data released this afternoon in the States that could potentially drive the Dollar with the release of the ADP Employment report for the month of August, which is widely expected to show a rise from 99,000 in July to 115,000 this month and should provide an insight into the monthly job report on Friday. Elsewhere, the revised GDP estimate for the second quarter will provide an indication of economic growth in the States and forecasters are anticipating an increase to 3.1% from 2.5% in the first quarter, while the annual growth rate may stay unchanged at 3.3%. However, if economic growth has moderated by more than expected then we can expect the Dollar to come under pressure against the majors as speculation will intensify that the next move for the Fed will be a cut in rates.

There was a sparse supply of economic factors in the Euro-zone yesterday with the focus falling on German consumer confidence, which increased to a near five-year high in August. The Euro also received a boost ahead of the interest rate announcement tomorrow on speculation that the ECB chairman, Jean-Claude Trichet, will signal a further rise in rates in October while the Fed and the BoE hold their benchmark rate steady. It is widely anticipated that the Central Bank will keep rates on hold at 3.0% tomorrow following a rise earlier this month but we can expect the Euro to make further gains against the Pound if Trichet maintains his hawkish stance towards a further tightening of monetary policy before the end of the year.

The Pound has been gaining over the past week as economic growth continues to show signs of accelerating while house prices have also increased this month indicating that the Bank of England will have the scope to raise interest rates further following the surprise move in August. Despite a lack of fundamental data released, Sterling has made significant gains against the Dollar in the past 24hrs as comments from Gordon Brown have seemingly boosted growth expectations. The Chancellor's belief that UK economic growth will come in ahead of the Treasury's forecast this year has increased speculation that the BoE will need to lift interest rates again over the coming months with the next meeting scheduled for early September. There is some significant data released in the UK this morning including the CBI Distributive Trades survey, which provides an indication of short-term trends in the UK retail sector with forecasters anticipating a modest drop in August, while UK mortgage approvals may ease slightly in August fro 120,000 last month.

Data Released 30th August

UK 09:30 Mortgage Approvals (July)
UK 11:00 CBI Distributive Trades Survey (August)

U.S 13:15 ADP Employment Report (August)
U.S 13:30 GDP / Deflator (Q2 Revised)

written by Adam Solomon