Daily Insight

The U.S Dollar remained relatively unchanged last night after the Federal Reserve held interest rates at 5.25% for the first time since June 2004 after 17-consecutive rate hikes. The accompanying statement seemed to suggest that Fed policy makers are not so concerned with rising inflationary pressures, as the committee voted 9-1 in favour of keeping rates on hold. Therefore, speculation has already begun that the Fed will continue to keep rates on hold in September as the statement suggested inflation would moderate over time, indicating that interest rates are at an appropriate level. However, the Dollar was largely unaffected in the aftermath of the announcement and held firm around 1.9070 last night as the market had anticipated only a 20 per cent chance of a rate hike this month. There was also some significant economic data released yesterday in the States that seemed to suggest that U.S inflation is still accelerating even though growth in the economy appears to be moderating. Unit Labour costs expanded to a 2-year high in the second quarter, increasing to 4.2% from just 2.5% in the first while elsewhere, Nonfarm productivity rose by significantly less than expected with the annual growth rate up just 1.1% from the first quarter. The focus today in terms of data released will be the U.S Trade Balance for June and forecasters are anticipating that the deficit in good and services probably expanded to $64.0 Billion for the month of June. We can expect the Dollar to come under pressure should the deficit increased by more than expected, while elsewhere, the weekly jobless report will provide an indication of U.S unemployment, which has steadily increased over the last month.

The Pound continues to remain firm against the majors but we might of expected to see some further gains yesterday after a report by the British Retail Consortium showed that sales had jumped 6.1% in the year to July following gains of just 4.7% in June. It seems that surging energy costs and therefore, rising utility bills have failed to deter the consumer but if the pace of economic growth begins to moderate, last week's surprise rate hike by the Bank of England will be questioned as a touch premature. On that note, the focus this morning will fall on the Bank of England's quarterly inflation report and press conference as investor's attempt to gauge why the MPC decided to lift UK interest rates this month. Sterling may come under some pressure if the report shows that inflation hasn't accelerated at the pace anticipated in the last quarter and that may rein in interest expectations. There is also some significant data released in the UK this morning with the Global Trade Balance expected to show that the deficit narrowed slightly in June after the gap in goods and services increased to £6.8 Billion in May, which was the biggest increase since February and suggested that UK exports will be unable to fuel economic growth.

The Euro may make further gains against the Dollar after the Federal Reserve decided to hold U.S interest rates last night, while the ECB have signalled that further rate hikes may be 'warranted' over the coming months and therefore, the rate differentials between the two economies will continue to compress. However, the data released hasn't been too positive and there has been a sparse supply of economic data released this week in the Euro-zone but the German Trade surplus did provide a relative reprieve yesterday, increasing by more than expected in June. Elsewhere, German industrial production actually fell 0.4% to bring the annual rate of growth down from 6.0% to 4.6%. The Euro remained relatively unchanged versus the Pound yesterday as we closed around 1.4840 and without any significant Euro-zone data released, the market may be fairly quiet for the remainder of the week.

Data Released 9th August

UK 09:30 Global Trade Balance (June)
- Trade Balance ex EU

UK 11:00 BoE Quarterly Inflation Report & Press Conference

U.S 15:00 Wholesale Inventories (June)

written by Adam Solomon