Daily Insight

The Pound came under further pressure yesterday, dropping 0.3% against the Euro and falling 0.2% versus the U.S Dollar after a report on the UK global trade balance showed that the deficit in goods and services actually widened in July. A sharp decline in exports, partly due to the underlying strength of Sterling, contributed to a shortfall of £6.33 Billion, which was slightly larger than forecast while exports out of the UK fell a staggering 13% from June. Therefore, it looks increasingly unlikely that trade will be unable to support economic growth this year and together with a softer than expected report on producer price inflation, the Pound continued to weaken. The producer price index came out below expectations with a significant monthly decline in input prices suggesting that inflation may have moderated in the third quarter, alleviating some of the pressure on the Bank of England to continue raising interest rates this year. Therefore, the inflation data released this morning in the UK will take on added significance and if the consumer price index has mirrored the PPI in the month of August, we can expect the Pound to weaken further as expectations shift away from a probable rate hike in November. Consumer prices are widely expected to have increased to an annual rate of 2.4% in August, which would be largely unchanged from July and would suggest that UK inflation continues to accelerate despite a surprise rise in interest rates last month.

There was a distinct lack of significant data released in the Euro-zone yesterday although the single currency continued to make further gains against the Pound and firmed an additional 0.1% against the Dollar following comments from ECB member Jurgen Stark, who emphasised the need for a further tightening of monetary policy. In his statement, Stark reiterated that Euro-zone inflation would remain above the Central Bank's target this year and that higher interest rates would not have a damaging effect on economic recovery. In addition, another member of the governing council publicly stated his belief that economic growth and inflation may have exceeded initial forecasts both for this year and in 2007, leading to a further tightening of interest rates. The chairman of the ECB, Jean-Claude Trichet has already given a strong indication to the market that Euro-zone interest rates will be lifted early next month and we can therefore expect the Euro to make further gains over the coming weeks.

The renewed appetite for the U.S Dollar has been built on speculation that the Federal Reserve may not be finished in raising U.S interest rates this year after a report on labour costs suggested inflation was accelerating despite 17-consecutive rate hikes in under two years. The Dollar continued to make gains yesterday ahead of an important week of economic data including retail sales, consumer price inflation and the trade data released this afternoon. Therefore, the market will be looking for confirmation from the CPI on Friday that inflation has exceeded expectations in August and if prices have risen by more than the projected 0.2%, we can expect the Dollar to strengthen further ahead of the next FOMC rate announcement on the 20th September. The focus today in terms of economic data will be the release of the U.S trade deficit, which is widely expected to have widened to $65.5 Billion in the month of July, the third biggest on record, primarily due to a sharp rise in crude oil prices and an increase in imported goods into the States.

Data Released 12th September

UK 09:30 Retail Price Index (August)
- Consumer Price Index

U.S 13:30 Trade Balance (July)

written by Adam Solomon