Daily Insight

The Euro made significant gains against the Pound yesterday amid the release of the Ifo index, which showed that business confidence in Germany exceeded expectations this month, which has revived speculation that the ECB will lift interest rates twice more this year. The index fell to a reading of 105 in August, which was a smaller decline that forecast with the market anticipating a sharper fall following the collapse of the ZEW survey on investor confidence in the region. The Euro has strengthened by 8.2% against the Dollar this year alone on expectations that the ECB will outpace the Federal Reserve in raising interest rates this year. Therefore, Euro buyers would be well advised to take advantage of the current rate against the Pound with the market looking increasingly overbought, we can expect a correction to take place at some stage, particularly if the ECB decide to lift interest rates in September. However, following the collapse of the ZEW survey, it does look increasingly likely that higher taxes, rising interest rates and slowing global growth will hamper economic expansion in the fourth quarter and may prompt the Central Bank to adopt a more cautious approach to monetary tightening.

The Pound remained relatively unchanged against the Dollar yesterday, firming a further 0.1% at close although we have traded back under 1.8900 this morning. There has been a real sparse supply of economic data released in the UK but the focus this week will fall on the GDP report this morning with the revised estimate expected to confirm economic growth at 0.8% in the second quarter. However, if the report exceeds expectations with economic growth accelerating faster than anticipated, we can expect Sterling to strengthen significantly against the majors as speculation will intensify that the Bank of England may raise interest rates again in order to bring inflation back under control.

The Dollar has looked increasingly volatile this week and that trend continued yesterday following a better than expected report on U.S Durable Goods Orders, which showed that parts of the economy continue to show signs of growth. Excluding transport, capital goods orders increased by 0.5% in July, which was more than anticipated and suggests that corporate investment will help spur economic growth as the housing and consumer sectors show signs of slowing. In addition, the weekly report on jobless claims showed that the number of people out of work and claiming benefits actually fell by 1,000 in the week ending August 19th, which provides an insight into the U.S labour market as steady job gains and rising wages may encourage consumers to carry on spending. However, the Dollar came under pressure yesterday following a report on the U.S housing market as the sales of new homes mirrored the previous report earlier this week, dropping by more than forecast at 4.3% to an annual rate of 1.072 million.

Data Released 25th August

UK 09:30 GDP (Q2 Revised)

written by Adam Solomon