Daily Insight

The Pound came under some pressure in early trading yesterday following the release of July's Consumer Price Index, which indicated that UK inflation had moderated slightly in the last month. Prices dropped by 0.1% from June with the annual inflation rate falling back towards 2.4% and speculation that the Bank of England will continue raising UK interest rates may be a touch premature. However, the governor of the BoE, Mervyn King, has issued a statement earlier this month where he concluded that UK inflation may peak at 3.0% by the end of the year. Therefore, the market may still anticipate another rate hike and with factory gate inflation rising for a seventh month in succession and UK house prices breaching a two year high in July, the Bank certainly have scope to continue raising rates from the current 4.75%. The focus today will fall heavily on the release of the minutes from the Bank of England's last policy meeting, which will take on added significance following the soft inflation data yesterday. The minutes will provide an insight into the reasons behind the MPC's decision to lift UK rates this month and the Pound may given a boost should the statement indicate a further rate rise to come. In addition, there is also some significant economic data released this morning with UK unemployment widely expected to remain relatively unchanged from June where the number of people out of work fell from a three-year high.

The Euro has been relatively muted this week despite economic growth in the Euro-zone jumping to a six-year high in the second quarter. The ECB look set to continue raising interest rates beyond the current 3.0% as economic growth continues to accelerate. There has been a sparse supply of significant data released this week in the region but with speculation building that Euro-zone interest rates will continue to rise, we can expect the Euro to strengthen against the majors over the coming months.

The Dollar declined against the Pound and the Euro yesterday following the release of the July Producer Price Index, which provides a measure of factory-gate inflation in the States, with prices increasing just 0.1% in July. However, the Core rate excluding food and energy unexpectedly dropped by 0.3% from the previous month, which indicates that the Federal Reserve were right in holding interest rates in August as economic growth begins to moderate in the third quarter. In addition, the Empire State Manufacturing survey showed that growth in the sector accelerated at the slowest pace in more than a year with the index dropping to a reading of 10.3 this month from 16.6 in July. The Dollar fell by 0.6% versus the Euro and a further 0.3% against the Pound by the close of trading last night and with the Consumer Price Index released this afternoon, the Dollar may come under further pressure particularly if U.S inflation has scaled back from 2.6% last month.

Data Released 16th August

UK 09:30 MPC Minutes of 2/3 August meeting
UK 09:30 Unemployment (July)
UK 09:30 Average Earnings (3 months to June)

U.S 13:30 Consumer Price Index (July)
- Ex Food & Energy
U.S 14:15 Industrial Production (July)
U.S 14:15 Capacity Utilisation (July)

written by Adam Solomon