Daily Insight

The Pound made significant gains against the majors yesterday, firming 0.8% versus the U.S Dollar and a further 0.3% against the Euro after slumping to a two week low in the midst of some poor economic data, which has severely muted claims that the Bank of England will enter a sustained period of monetary tightening. There is a sparse supply of fundamental news flow this week both in Europe and the UK but the Pound shrugged off some poor housing data yesterday to close around 1.4700 versus the Euro. The Rightmove House Price indicator unexpectedly declined 1.6% this month from 2.9% in July while the annual rate fell towards 9.0%. The survey suggested that the apparent slowdown in the housing market was a result of seasonal factors but also indicated that prices may of peaked for 2006 as buyers become concerned with increased borrowing costs leading to higher mortgage rates. The key economic data released this week in the UK will be the CBI industrial trends survey tomorrow and the second quarter GDP report due out on Friday, both of which are expected to show that economic growth has continued to accelerate in the second quarter.

The Euro has made significant gains in the past week as speculation intensifies that the ECB will increase the pace of monetary tightening in the Euro-zone as economic growth continues to accelerate from the six-year high in the second quarter. Therefore, the Euro-zone economy is seen as growing at a pace that would sustain a further two rate rises this year and we can therefore expect the Euro to make further gains against the majors over the coming months. However, there is some significant data released in the Euro-zone this morning with German investor confidence widely expected to fall to the lowest level in almost four years on concerns that higher interest rates will hamper economic expansion in Europe's largest economy. The ZEW survey for investor confidence may have dropped to a reading of 11.4 in August, which is the lowest level since December 2002. The Euro may come under further pressure if Industrial activity in the Euro-zone has increased by less than anticipated with orders expected to increase by upto 0.4% in June.

The U.S Dollar suffered sharp losses against the majors yesterday despite an apparent lack of any fundamental data released in the States but the negative sentiment surrounding the Dollar can be attributed to a delayed reaction to a string of poor economic data in the last week. As a result, U.S interest rates expectations have been severely muted for the coming months as inflation moderates while economic growth continues to show signs of slowing into the third quarter. In addition, Industrial Production and manufacturing output has also come in weaker than expected in the past month while rising petrol prices and significantly higher interest rates are beginning to weigh heavily on consumer sentiment. The Dollar declined by 0.7% against the Euro yesterday, dropping to an 11-week low at 1.2900 and with a distinct lack of economic data released until Wednesday with existing home sales, we can expect the Dollar to remain fairly muted against both Sterling and the Euro.

Data Released 22nd August

EU 10:00 Industrial Orders (June)

GER 10:00 ZEW Expectations Balance (August)

written by Adam Solomon