Daily Insight

The Pound dropped 0.2% against the Euro yesterday to close well under 1.4800 following the release of the minutes from the MPC's last interest rate announcement where policy makers elected to raise UK interest rates for the first time in 14-months. The committee voted 6-1 in favour of lifting rates in August with the market anticipating a unanimous decision and the minutes also indicated that the Bank of England would not enter a new cycle of monetary tightening as was widely expected. UK inflation has moderated slightly to 2.4% in the last month, which is still well above the government's comfort zone and therefore fuelled speculation that a further rate increase was needed. However, the language used in the accompanying statement yesterday indicated that policy makers would be prepared to reverse the decision to hike rates in August and the move would lessen the need for more aggressive action later. The Pound came under further pressure when a report on UK unemployment showed that the number of people out of work increased by 2,000 in July to 957,000, the most since January 2002, while UK average earnings increased by more than expected as consumers demand higher wages to cope with rising energy costs. The focus today in terms of economic data released will be UK retail sales for July and forecasters are anticipating a further increase of 0.2% from June.

The Euro made gains against the majors yesterday despite a sparse supply of economic factors driving the single currency. Instead, the Euro reacted to some soft inflation data in the States to climb 0.6% versus the Dollar, while also firming against the Pound amid the release of the minutes from the Bank of England. There is some significant data released this morning in the Euro-zone with the Harmonised Index of Consumer Prices (HICP) widely expected to confirm an annual inflation rate of 2.5% in the Euro region. Elsewhere, the Euro may come under pressure with Industrial Production data expected to show that activity dropped by 0.1% in June.

The Dollar slipped against the Euro and the Pound yesterday as we briefly traded back above 1.9000 for the first time this week. The weakness came from a softer than expected inflation report, which showed that prices charged for U.S consumer products increased by the smallest amount since February this year. Core prices, which excludes food and energy, only increased by 0.2% from June and it looks increasingly likely that U.S interest rates have now peaked at the current 5.25%. With inflation moderating and economic growth seemingly slowing in the third quarter, the market has factored in a less than 50 per cent chance that the Fed will raise U.S interest rates again this year. The Dollar came under further pressure yesterday after a report showed that industrial production had unexpectedly declined in the figures for July, while elsewhere, Housing starts dropped to the lowest level in nearly two years to an annual rate of 1.795 million as higher mortgage rates discouraged first time buyers. The focus in terms of data released will fall on the Philly Fed Index, which analyses manufacturing conditions in the Philadelphia region and forecasters are anticipating a stung reading for July.

Data Released 17th August

UK 09:30 Retail Sales (July)

EU 10:00 HICP (July)
EU 10:00 Industrial Production (June)

U.S 13:30 Initial Jobless Claims (w/e 12th August)
U.S 15:00 Leading Indicators (July)
U.S 17:00 Philly Fed Index (August)

written by Adam Solomon