Daily Insight

The Bank of England unexpectedly raised UK interest rates yesterday for the first time in nearly two years, sighting rising inflationary pressures and faster economic growth for the seemingly premature move. The market had only factored in a 15% chance that policy makers would lift interest rates by a quarter point to 4.75% and thusly reverse the cut in rates 12 months ago. Therefore, Sterling has rallied furiously against the majors, rising by 0.5% versus the Dollar to close up and around 1.8850 and a further half a point jump against the Euro as we closed above 1.4700 for the first time since May. It was widely anticipated that the Bank would raise UK rates at some point in the third or fourth quarter as growth in the economy accelerated at the fastest pace in two years with inflation creeping up to 2.5%, well above the government's 2% comfort zone. The Bank of England have now followed other central banks around the world in raising borrowing costs but by no means are we entering a new cycle of monetary tightening and therefore, the BoE's move yesterday can be merely described as a measure to control inflation.

The Euro was unable to put up much of a fight yesterday despite the European Central Bank raising their benchmark interest rates for the fourth time this year, which was widely expected and largely factored into the market. However, in the accompanying press conference, the chairman of the ECB, Jean Claude Trichet, gave an insight into the Central Bank's future intentions with regard monetary policy, saying that further interest rate hikes maybe 'warranted' in the coming months. Although, he did drop the word 'vigilant' from the statement, a word he has used to signal previous rate increases. Elsewhere, there was some significant data released in the Euro-zone prior to the ECB announcement as the European service industry fell from the six year high in June as rising oil prices and higher interest rates curbed growth in July. The Euro was also hampered by weak retail data for June as the staging of the World Cup in the region failed to boost sales, which only increased by 0.5% against expectations of 0.8% growth. There is a sparse supply of economic data released in the Europe or the UK this morning but the Euro may come under further pressure against the Pound if Manufacturing in Germany grew by less than 1.0% in June.

The Dollar came under intense pressure yesterday, making further losses against Sterling following the BoE's surprise decision to lift UK interest rates. It is looking increasingly likely that the Federal Reserve will hold interest rates next week with investor's believing a further tightening of monetary policy could send the U.S economy closer to recession. However, the market has factored in a 50:50 chance that the Fed will continue raising rates in August following the Personal Consumption and Expenditure report on Tuesday, which showed that inflation was still accelerating. There was some significant data released in the States yesterday as U.S retailers reported gains in July sales that exceeded expectations as consumer spending shows no signs of cooling, despite rising petrol prices and considerably higher interest rates. While elsewhere, the number of people out of work and claiming benefits rose by 14,000 in the last week and the ADP employment report, which acts as an insight into Nonfarm payrolls this afternoon, only showed an increase of 99,000 jobs last month. The monthly U.S job report, released this afternoon, will take on added significance and could potentially shift expectations on the Fed's decision and forecasters are anticipating that the U.S economy has added 150,000 jobs in July with the unemployment rate expected to be unchanged at 4.6%.

Data Released 4th August

GER 11:00 Manufacturing Orders (June)

U.S 13:00 NonFarm Payrolls (July)
- Unemployment Rate
- Average Hourly Earnings

written by Adam Solomon