Daily Insight

The Dollar remained largely unchanged against the majors yesterday, dropping a modest 0.1% versus the Pound despite a host of positive economic reports, which provides a further insight into the renewed optimism in the U.S manufacturing sector. The Philly Fed index is just the latest regional survey to show substantial growth in factory activity over the past month as the survey actually tripled the initial forecasts by rising to a reading of 18.0 in June. The unexpected rise in production in the Philadelphia region saw the index increase to the highest level since April 2005 as new orders doubled and companies reduced their inventories to the lowest level in a year. Elsewhere, the Dollar also failed to make any significant gains as an index of leading economic indicators rose slightly more than expected in May and gave a promising upward revision for the previous month. However, the weekly jobless report showed that the number of people out of work and claiming benefits actually jumped to an annual rate of 324,000 amid concerns over a softening in the U.S labour market, which threatens to curtail the pace of economic expansion.

The negative sentiment surrounding the Euro continued yesterday as the single currency failed to make any gains against the Dollar despite a positive report on the European manufacturing and service industries. The Purchasing Manager's index rose to a reading of 57.7 in the flash estimate for June amid record low unemployment and increased business investment. The fastest global growth in 30-years has provided a significant demand for European based goods, which has seen the economy accelerate at the fastest pace in over seven-years. The preliminary index of service sector growth, which accounts for two thirds of the economy, increased to a reading of 58.3 in June while growth in manufacturing also beat expectations with a figure above 50 indicating expansion. Nevertheless, the Euro was little changed in the aftermath of the report but may receive a timely boost this morning amid the release of the German Ifo sentiment index. The report is expected to illustrate that business confidence in Europe's largest economy remained at a near record level in June despite the surprising drop in the ZEW survey earlier this week.

The Pound has made robust gains against both the Euro and the Dollar over the past week as a hawkish rhetoric from the governor of the Bank of England was combined with the minutes from the Bank of England's last policy meeting where the MPC voted 5-4 in favour of holding rates this month. As a result, speculation has intensified that UK interest rates are set to rise by a further 25 basis points next month and subsequently, the Pound has risen to a fresh three-month high against the Euro. The UK currency also made modest gains against the Dollar yesterday following a report from the Confederation of British Industry. The Industrial trends survey showed that orders accelerated by more than expected in June, which indicates that the strength of the Pound is not currently weighing on overall demand. The report is just the latest round of economic data that suggests that the UK economy is continuing to show robust signs of growth and that is likely to lead to a further rate hike in either July or August.

Data Released 22nd June

GER 09:00 Ifo Sentiment Index (June)

EU 10:00 Industrial Orders (April)

written by Adam Solomon