Daily Insight

The Euro came under sustained pressure yesterday, dropping by a further 0.4% against the Pound and falling from a two-week high versus the Dollar. The negative sentiment surrounding the Euro can be attributed to a report from the ZEW centre of economic research, which showed that German investor confidence dropped to lowest level in over 5-years in August, primarily due to a sharp rise in borrowing costs and next year's VAT rise in Germany, which threatens to undermine growth. The ZEW index dropped significantly from a reading of 15.1 in July to 5.6 this month and this is the seventh consecutive fall, which emphasis that business confidence may be severely muted over the coming months as oil prices continue to rise while Euro-zone interest rates are poised to increase further from the current 3.0%. As a result, the Euro declined by 0.6% against the Dollar and we closed well above 1.4700 versus the Pound last night. However, the European Central Bank are still widely expected to raise Euro-zone interest rates in the next month as inflation continues to accelerate almost half a percentage point above the Bank's target. Therefore, we can still expect the Euro to make gains over the coming months and Euro buyers would be well advised to take advantage of the current rate.

The Pound has been in rapid decline over the past week, due to a string of poor economic data, which has undermined expectations that the Bank of England will enter a new cycle of interest rate rises. However, Sterling was given a reprieve yesterday, particularly against the Euro, following a disappointing report on investor confidence in Germany. There is a sparse supply of fundamental UK data released this week but the focus this morning will fall on the CBI Industrial Trends survey for August with forecasters anticipating a modest drop in business expectations and new orders this month. The Pound also received a boost from comments from the ECB council member Axel Weber who hinted at the reallocation of Germany's reserves from gold into foreign currencies with Sterling a realistic candidate for inclusion in their foreign exchange reserves.

The Dollar has remained relatively unchanged in the past 24hrs due to a sparse supply of U.S data released, although we have seen some upside movement versus the Euro and the Japanese Yen. U.S economic growth seems to be moderating according to the recent surveys on consumer and business sentiment, which has dramatically shifted expectations that the Fed will not raise interest rates again this year. Therefore, the report on the U.S housing market this afternoon will take on added significance with forecasters anticipating a further a drop in the sales of existing homes in the last month with the annual rate falling to $6.50 million. The collapse in the U.S housing market this year can be attributed to significantly higher interest rates as the Fed's two year campaign has seen rates peak at 5.25%, which makes mortgages far more unattractive for first time buyers.

Data Released 23rd August

UK 11:00 CBI Industrial Trends Survey (August)

U.S 15:00 Existing Home Sales (July)

written by Adam Solomon