Daily Insight

The Pound may come under severe pressure today as the national alert was raised to 'critical' following a foiled plot to blow up a UK airline. Sterling fell by the most in two weeks and those of you buying either euros or dollars may be well advised to go to market sooner rather than later. The Pound dipped against the Euro yesterday as we dropped under 1.4800 for the first time in little under a week as the UK trade deficit narrowed by less than expected in June. The shortfall in goods and services widened to £6.8 Billion in May, which was the biggest increase since February and fuelled concerns that UK exports would be insufficient in fuelling economic growth this year. The consensus forecast was for a slight improvement in trade for the month of June but in a climate of rising interest rates and higher energy costs, it seems a strong pound will further hamper UK exports in the second half of 2006. The focus yesterday turned to the Bank of England's quarterly inflation report, which showed that growth in the economy will continue to accelerate with inflation peaking at 2.7% by the end of the year. This is well beyond the government's comfort zone and speculation will intensify that this month's surprise rate hike will be repeated in the coming months as the BoE attempts to bring inflation back under control. However, the surprising hawkish tone of the report failed to boost the Pound as we dropped by 0.4% versus the Euro at the close last night.

The Euro made gains against Sterling and the Dollar yesterday despite the apparent lack of any significant economic data in the Euro-zone. However, the ECB monthly bulletin is widely expected to mirror the tone of the press conference last week where the chairman, Jean-Claude Trichet, said that a further tightening of interest rates may be warranted in the coming months. Crucially, the language used in the statement wasn't as aggressive towards raising interest rates as in previous months with Trichet dropping the word 'vigilant' from the statement, a term the market has come to associate as a signal for a future rate increase. Therefore, the monthly bulletin this morning will take on added significance and may provide some direction on the Central Bank's stance with regard a further rise in Euro-zone interest rates.

The Dollar remained relatively unchanged against the Pound yesterday, holding firm above 1.9000 as U.S wholesale inventories rose by 0.8% June, which was slightly ahead of expectations following a revised 0.9% gain in May and it seems that rising petrol prices and higher interest rates are not having a damaging effect on consumer demand as sales increased by 1.4%. The monthly U.S Trade Balance is actually released this afternoon in the States with forecasters anticipating that the deficit probably grew to $64.0 Billion in June. The Dollar may come under pressure if the gap in goods and services actually increased by more than anticipated, while the weekly jobless report will provide an indication of the relative strength of the U.S labour market after the unemployment rate rose to 4.8% in July.

Data Released 10th August

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Weekly Jobless Claims w/e 05 August
U.S 13:30 Trade Balance (June)
U.S 21:00 Treasury Budget (July)

written by Adam Solomon