Daily Insight

Following the unexpected increase in UK consumer price inflation earlier this week, the Pound has been making steady gains against the majors, closing back above 1.4800 against the Euro and gaining a further 0.7% versus the Dollar at 1.8900. The positive sentiment surrounding Sterling continued yesterday following a report on UK retail sales that showed a rise of 0.3% from July, which was largely in line with expectations although the core rate rose by 4.3% year-on-year with forecasters anticipating a more modest increase towards 4.1%. The Pound rallied on the release of the data as a rebound in consumer spending together with renewed inflationary pressures will surely lead to a further tightening of UK interest rates later this year as growth in the economy continues to accelerate. In addition, the RICS house price balance continued the current trend of optimism surrounding the UK housing market as the survey came out slightly ahead of expectations. Without any significant economic data released this morning in the UK, the market will turn to the CBI Industrial Trends survey next week for further evidence of a pick-up in industrial production and manufacturing output, which would also add weight to calls for a further quarter-point rise in interest rates.

The lack of fundamental data released this week in the Euro-zone has continued to weigh on the single currency although any downside weakness was limited yesterday following a press conference from the chairman of the European Central Bank, Jean-Claude Trichet who reiterated his hawkish rhetoric for a further rise in Euro-zone interest rates next month. The ECB has been notoriously transparent this year in their intentions to raise rates four times since December and yesterday Trichet reiterated that the Central bank will act in accordance with "strong vigilance" in order to bring inflation back under control. Inflationary pressures continue to mount in the twelve nations sharing the Euro and overnight, a report on labour costs rose by more than expected in August, adding to the case for higher interest rates. There is some significant economic data released this morning in Europe with the Consumer Price Index widely expected to increase by 0.1% in August following the first decline in six months in July. Higher energy costs accompanied by a steady recovery in regional demand are expected to keep Euro-zone inflation above the central bank's 2.0% target at an annual rate of 2.3%. The Euro may receive a boost this morning if the report on consumer price inflation exceeds expectations as it would cement the prospect of a further rate hike next month.

The Dollar continued to trade down yesterday, falling a further 0.4% against the Euro despite a seemingly strong report on U.S retail sales, which briefly pushed the dollar higher as sales increased by 0.2% in August following robust growth in July. However, the core figures showed that sales dropped below the consensus 0.3% year-on-year last month as weakening consumer confidence and a slowdown in the housing market will continue to hamper sales growth in the coming months. However, the weekly jobless report provided some good news for the economy as jobless claims rose by less than expected in the week ending the 9th September and claims have dropped consistently for the last five weeks, which provides an insight into the U.S labour market ahead of the non-farm payrolls report in the first week of October. Without doubt, the focus today in terms of economic data will be the report on U.S consumer price inflation as investors look for any signs of a revival in monetary tightening. The index is widely expected to increase by 0.2% in August, excluding food and energy, which would provide a further indication that inflationary pressures are easing following a significant decrease in petrol prices in the last month. The Dollar may come under further pressure against the majors this afternoon as industrial production is expected to slow in August, showing only modest growth of roughly 0.2% following an increase of 0.4% in July.

Data Released 15th September

EU 10:00 Harmonised Consumer Price Index (August)
EU 10:00 Trade Balance (July)

U.S 13:30 Consumer Price Index (August)
U.S 14:15 Industrial Production (August)
- Capacity Utilisation
U.S 14:45 Michigan Sentiment (Sept Prelim)

written by Adam Solomon