Daily Insight

The positive momentum surrounding the Pound continued for a second consecutive session yesterday, rising a further 0.3% against the Euro and approaching 1.9900 versus the ailing U.S Dollar. Despite the distinct lack of economic data released in the UK yesterday, the Pound rallied on increased speculation that the Bank of England will lift interest rates to a fresh six-year high over the next couple of months. Therefore, the focus this morning will fall largely on the release of the minutes from the Bank of England's last policy meeting where the MPC decided to hold interest rates at 5.50%. The tone and language used in the report may provide an insight into the timing of the next rate increase but it will be interesting to gauge how many members of the nine-strong committee are leaning towards a tightening bias. Although recent reports have shown that consumer price inflation fell dramatically in April and again in May, one of the key reasons behind the Bank's hawkish stance are survey evidence pointing towards rising prices in the manufacturing, retail and service industries. In addition, the governor of the Bank of England, Mervyn King, is due to deliver a speech later this afternoon and following his comments last week in Cardiff, we can expect the tone of his statement to reflect heightened concerns over rising inflationary pressures.

The Euro continued to decline against a resurgent Pound yesterday but rose to a near two-week high versus the Dollar despite an unexpected drop in German investor confidence. After six consecutive increases, the ZEW expectations index slid to a reading of 20.3 in June from 24.0 the previous month despite initial forecasts of a rise towards 29.0. The report provides the latest indication that higher borrowing costs are beginning to weigh on investor confidence while growth in the Germany economy looks to have peaked following the fastest pace of expansion in seven-years. The European Central Bank raised its benchmark rate for the eighth time since the fourth quarter of 2005 as the chairman, Jean-Claude Trichet, indicated that a further rise in rates may be warranted this year. However, the negative report yesterday from the ZEW centre of economic research is not expected to influence monetary policy and a further quarter-point rate hike is still very much forecast in September.

The Dollar came under intense pressure against the majors yesterday, dropping to the lowest level in two-weeks versus the Euro and also falling significantly against the Pound following a barren run of weak economic data. Builders started work on fewer homes than anticipated last month as U.S housing starts fell 2.1% in May as lower house price and added incentives failed to increase demand as a glut of unsold properties continues to swell the market. The report provides an indication that the slump in home construction will continue to suppress economic growth and as a result, the Dollar came under further pressure against the Pound and the Euro. In addition, the sustained slump in housing is likely to help push down U.S treasury yields, diminishing the allure of dollar-denominated assets, which has recently been the catalyst for the Dollar rally.

Data Released 20th June

UK 09:30 BoE MPC Minutes 6th-7th June Meeting

written by Adam Solomon