Daily Insight

The Pound was given a timely reprieve yesterday and made significant gains against the majors, firming 0.6% against the Dollar to close around 1.8750 and a further 0.4% versus the Euro as UK inflation unexpectedly quickened in August to reach the highest level in nine years. Consumer prices rose to 2.5% year-on-year last month from 2.4% in July, which suggests that the Bank of England still have the capacity to raise UK interest rates this year. The core measure of inflation, excluding food and energy, rose to an annual rate of 1.1% and August was the fourth consecutive month that the Consumer Price index remained above the government's 2.0% target. Therefore, it looks increasingly likely that UK interest rates will be lifted again in the fourth quarter with many economists pricing in a probable rate hike in November. The UK economy has accelerated at the fastest pace in two years in the second quarter of 2006 and together with higher inflation caused by record oil prices, the BoE will need to increase borrowing costs in order to bring inflation back under control. However, the Pound may come under some pressure this morning with UK unemployment expected to rise to the highest level in over four years in August with the number of people out of work and claiming benefits rising by 4,000 in July to an annual rate of 961,000, the most since December 2001.

The Euro declined against the Pound yesterday and also fell fractionally against the Dollar amid a distinct lack of economic data released in the Euro-zone as the focus this week falls on the harmonised consumer price index and the trade data on Friday. However, following comments from two ECB governing council members this week regarding a more aggressive stance towards monetary tightening, we can expect the Euro to remain relatively strong in the build up to the next ECB rate announcement in the first week of October.

The U.S Dollar has been making significant gains against the Pound over the last week on concerns that the Federal Reserve will continue raising interest rates in the coming months as inflation shows signs of accelerating. However, the dollar lost ground yesterday on the release of the U.S trade report, which showed that the deficit in good and services widened by much more than anticipated in July to a record $68 Billion as imports reached an all-time high while exports declined for the first time in five months despite a significantly weaker dollar. It seems that the trade gap in the States will continue to widen in the coming months despite evidence that economic growth is slowing as consumer spending continues to influence demand for overseas products. Imported goods rose by 1.0% in July while exports declined by 1.1% with many in the U.S blaming China's refusal to revalue their currency for the swelling of the deficit. However, the Dollar remained largely unchanged against the majors at the close as the record deficit will have little influence on interest rate expectations this year. Although, can also be argued that the Fed desire a weaker Dollar in order to make U.S exports more attractive to foreign investors and therefore, a rise in rates would be unlikely as it would promote significant dollar strength.

Data Released 13th September

UK 09:30 Unemployment (August)
UK 09:30 Average Earnings (3 months to July)

written by Adam Solomon