Daily Insight

Following on from last week, the Pound continued to weaken against the major currencies as the political fiasco surrounding Tony Blair's resignation reached fever pitch and the renewed interest rate speculation in the States helped push the Dollar. In addition, the Bank of England kept interest rates on hold at 4.75% this month despite a report from the national institute of social and economic research, which showed that inflation had accelerated in the UK in the three months to August. There is a plethora of significant economic data released this week in the UK with the focus falling on the inflation gauges out this morning and tomorrow. The Producer Price Index is widely expected to show that output prices rose by 0.2% in August while the Consumer Price Index released tomorrow may show that the year-on-year inflation rate held steady at 2.4% last month. However, it is widely anticipated that UK inflation will reach 3.0% over the winter months, primarily due to a significant increase in energy prices this year and therefore, the BoE will need to raise UK interest rates in an attempt to bring it back under control. The Pound may receive a much needed boost this morning with the release of the monthly trade data and forecasters are anticipating that the deficit in goods and services actually narrowed in July to a figure around £6.2 Billion.

The Euro made significant gains against Sterling last week due to a host of positive economic factors, which further emphasised the need for higher interest rates in the Euro-zone. Firstly, a rise in exports out of Germany and growth in the industrial sector has led to speculation that the largest economy in Europe will grow at the fastest pace in six years in 2006 while several ECB policy makers have expressed their concerns over higher inflation and the need for a further tightening of monetary policy. The is a distinct lack of fundamental data released in the Euro-region this week with the focus falling on the Harmonised consumer price index, which is widely expected to show that inflation remain unchanged from the flash estimate of 2.3%.

The main theme from last week was undoubtedly the renewed appetite for the U.S Dollar as a significant rise in labour costs in August has caused concerns that inflation will continue to accelerate this year despite the Fed's prolonged campaign of monetary tightening, which spanned 17-rate hikes in little under two years. The Dollar has been under intense pressure in the last 6-weeks following comments from the chairman of the Federal Reserve, Ben Bernanke, where he hinted that economic growth would slow in the second half of the year and inflation would moderate, which of course leads to speculation that interest rates will be kept on hold at 5.25% with the next move likely to be a cut. Therefore, the host of inflation and consumer data released in the later part of the week will take on added significance as the market looks for direction on whether the Fed will raise rates on the 20th of September. The consumer price index is widely expected to show a rise of roughly 0.3% in August with the core rate, excluding food and energy, up 0.2% and anything higher will create further tension surrounding U.S interest rates and may help the dollar make further gains against the Pound and the Euro.

Data Released 11th Sept

UK 09:30 DCLG House Prices (July)
UK 09:30 Producer Price Index (August)
- Output

UK 09:30 Global Trade Balance (July)

written by Adam Solomon