Daily Insight

The focus yesterday fell on the Bank of England interest rate announcement where the MPC elected to hold UK interest rates at 4.75% in September following a surprise increase last month. Economic growth has accelerated at the fastest pace in over two years in the second quarter of this year, which has prompted the government to raise their growth forecasts and inflation expectations for 2006. UK inflation is still well above the central bank's target of 2.0% and therefore, speculation continues to intensify that the BoE will raise interest rates once more before the turn of the year with many economists pricing in a further hike towards November. It was widely expected that UK interest rates would remain on hold yesterday as two consecutive hikes would of put the economy under great strain and as a result, the Pound remained largely unchanged against the majors on the announcement but closed around 1.8700 versus the Dollar last night. The political tension surrounding Tony Blair's resignation continues to weigh heavily on Sterling sentiment as the primeminister seems reluctant in naming the date of his departure. There was some significant economic data released in the UK yesterday, which provided yet more evidence that rise in rates is likely over the coming months as economic growth accelerated in the 3 months to a August according to a report from the national institute of social and economic research.

The Euro remained largely unchanged against the Pound yesterday despite a better than expected report on German industrial production, which expanded by 1.2% in July following a modest decline the previous month. Year-on-year orders jumped 4.7%, significantly higher than expected and provides further evidence that the German economy will grow at the fastest pace since 2000 this year, which only adds to speculation that the ECB will raise interest rates at least once more in 2006. There is a distinct lack of fundamental data in Europe or the UK today although the German trade balance has already been released and has showed that exports rose by more than expected in July as global economic growth increases demand overseas. Exports rose a revised 1.4% in July while forecasters had anticipated a rise in sales abroad of 0.6% from June. The trade surplus was largely unchanged but growth in German exports has fuelled company spending this year, leading to more jobs and therefore more disposable income to boost consumer sentiment.

The sentiment surrounding the U.S Dollar has shifted dramatically this week following a report on unit labour costs, which suggested that the Federal Reserve will have the scope to raise interest rates once more this year in the face of rising inflationary pressures. The Dollar has made significant gains, particularly against the Pound this week and that theme continued yesterday as the weekly jobless report showed that the number of people out of work and claiming benefits actually narrowed slightly to 310,000 claims in the week ending 2nd September. In addition, U.S wholesale inventories increased by 0.8% in July while sales rose a modest 0.4%, which provides an insight into next week's retail sales data.

Data Released 8th Sept

U.S 20:00 Consumer Credit (July)

written by Adam Solomon