Daily Insight

Following on from last week, the Dollar managed to make back further gains against the Pound on Friday following a string of significant economic and inflation data, which suggested that the Federal Reserve may need to continue raising interest rates following a pause at 5.25% early last week. U.S Retail Sales rose by more than expected in July, jumping by 1.4% following a rise in the purchases of autos and electronics and that suggests that rising petrol prices and higher interest rates are not having the negative impact on consumer sentiment that was anticipated. As a result, the Dollar held firm around 1.8900 versus the Pound and there is a plethora of significant inflation data released in the States this week, which should provide some direction as to whether the Fed will continue monetary tightening. The Consumer Price Index, released this Wednesday, is widely expected to show that prices increased in July with the annual core rate rising to 2.8% and with an increase in the PPI also anticipated, speculation will intensify that the Fed will need to continue raising interest rates in order to bring inflation under control.

The Pound has continued to look strong despite a sparse supply of economic data released in the past week and the terrorist alert at major UK airlines, which put Sterling under some pressure against the majors. The focus this week will fall on the minutes of the Bank of England's last policy meeting where the MPC unexpectedly raised UK interest rates by a quarter-point for the first time in more than a year. It is widely anticipated that the committee voted 7-0 in favour of hiking rates this month and the statement may provide some insight into the Bank's intention to continue monetary tightening as inflation continues to grow beyond the government's comfort zone. Therefore, the Consumer Price Index, which provides a measure of UK inflation, will take on added significance in the data released tomorrow and forecasters are anticipating a modest decline in July with inflation falling back towards 2.4% from 2.5% in June. There is some significant data released today in the UK with the Producer Price Index expected to show that input prices increased dramatically in July, rising by 0.9% from the previous month.

The Euro continues to struggle against the Pound as we closed around 1.4850 on Friday despite the apparent growth in the French and Italian GDP reports, which suggests that growth in the Euro-zone economy will continue to accelerate. This market is looking increasingly 'over-bought' and Euro buyers would be well advised to take advantage of these inflated rates as a correction is due to take place at some point with speculation continuing to drive expectations of higher interest rates in the coming months. There is some significant economic data released in the Euro-zone this morning with the Flash GDP report expected to show that growth in the economy accelerated by 0.7% in the second quarter, while elsewhere, growth in Germany may have increased by 0.4%, which provides further evidence that the ECB will need to raise interest rates beyond the current 3.0% to cope with the threat of rising inflation and faster economic growth.

Data Released 14th August

UK 09:30 Producer Price Index (July)
UK 09:30 ODPM House Prices (June)

EU 10:00 Flash GDP (Q2)

written by Adam Solomon