Daily Insight

The Pound held firm against the Dollar and the Euro yesterday despite a report on Producer Prices, which suggested that UK manufacturers had more scope to pass on higher commodity prices to the consumer. The Bank of England lifted interest rates for the first time in over a year in August in order to bring inflation back under control as economic growth continues to accelerate and the report yesterday may dampen expectations of a further tightening of interest rates in the coming months. Input producer prices rose significantly higher that forecast with year-on-year growth up to 9.7% but annual output prices held steady at 2.8% with the core measure dropping by more than expected at 0.1%. With a host of significant economic data released this week in the UK, we can expect further market volatility surrounding the Pound. This focus this morning will fall on the Consumer Price Index for July, which provides another gauge for UK inflation, and is widely expected to mirror the dovish sentiment of the PPI with forecasters anticipating a modest drop towards 2.4% last month. However, this is still well above the Central Bank's comfort zone and may prompt the MPC to hike UK interest rates once more this year.

The Euro remained relatively unchanged yesterday despite some positive economic data released in the Euro-zone with the Flash GDP report showing that growth in the economy accelerated at the fastest pace in six years in the second quarter, which will fuel speculation that the ECB will need to lift interest rates from the current 3.0%. Growth in the economy outpaced the U.S for the first time since 2001 in the second quarter and it is widely anticipated that the European economy will continue to expand for the remainder of this year, primarily due to higher borrowing costs and rising oil prices. It seems certain that the ECB will need to continue raising interest rates this year with the data showing robust gains in Business and Consumer confidence and the manufacturing and service sectors have hit six year highs in the last quarter. Elsewhere, economic growth in Germany, Europe's largest economy, accelerated faster than expected in the figures released yesterday with growth in France and Spain also exceeding expectations.

The Dollar has been boosted in the last week from a report on U.S Retail Sales last Friday, which showed robust gains in July, indicating that the Federal Reserve may need to continue raising borrowing costs after holding still at 5.25% this month. There is some significant inflation data released in the States this week that may shift interest rate expectations in September with the market currently factoring in only a 36 per cent chance of a rate hike in September. The Producer Price Index, released this afternoon in the States, is widely expected to show that prices increased by 0.4% in July excluding Food and Energy. This suggests that U.S inflation has continued to accelerate despite the Fed's aggressive policy towards raising interest rates and tomorrow's CPI will take on added significance with the year-on-year core rate up to 2.8% from 2.6% in June. In addition, the TIC's report this afternoon could give the Dollar a boost with net capital inflows widely expected to increase in June and will be sufficient in covering the ever-widening U.S trade deficit.

Data Released 15th August

UK 09:30 Consumer Price Index (July)

U.S 13:30 Producer Price Index (July)
- Ex Food & Energy

U.S 13:30 Empire State Index (August)
U.S 14:00 TIC's - Net Capital Inflows (June)

written by Adam Solomon
written by Adam Solomon