Daily Insight

Following on from last week, the Euro continued to slide against the majors, falling to a fresh three-month low versus the resurgent Pound following a barren run of weak economic reports. By the close of trading on Friday, the single currency had fallen a further 0.2% as German business confidence plummeted in the wake of a rebound in oil prices and rising European interest rates. The Ifo sentiment index fell by much more than anticipated to a reading of 107.0 in June amid increased speculation that economic growth in the region may slow from the fastest pace in six years. The report on Friday followed an unexpected drop in the ZEW survey for investor confidence and a decline in German manufacturing orders earlier in the week. Following the European Central Bank's decision to lift interest rates this month, there is a host of significant economic data released this week, which may have an influence on future monetary policy. In recent months the chairman of the ECB, Jean-Claude Trichet, has been publicly criticised by other members of the governing council for relying too heavily on the impact of money supply. Therefore, the focus will largely fall M3 moving average on Wednesday, which is expected to show that monetary aggregates remain well in excess of ECB comfort levels, rising 10.3% year-on-year in May.

The Pound made robust gains against the majors last week, rising to the highest level since March against the Euro and also testing the illusive $2.00 level amid the release of the minutes from the Bank of England's last policy meeting. The report revealed that a back-to-back rate increase in June was a real possibility as four members, including the governor Mervyn King, opted to raise interest rates this month in order to quell inflation. Nevertheless, the remaining policy makers of the nine-strong committee voted to keep rates unchanged as King remained in a slight minority for the first time in two years. The Pound rallied furiously in the aftermath of the report as speculation mounted that UK interest rates would rise to 5.75% in July, the fifth quarter-point hike in under a year and to the highest level in six-years. In terms of economic data, the Pound may come under some pressure over the course of this week amid the release of UK mortgage approvals on Friday. Recent reports have indicated that rising borrowing costs are beginning to slow the property market and discourage first-time buyers as the report is expected to show that the number of mortgages approved fell to 106,000 in May.

The Dollar came under renewed pressure against the Pound last week, dropping back towards the $2.00 level by the close of trading on Friday despite survey evidence that points to a sharp rebound in the U.S manufacturing sector. There is a plethora of significant economic reports released this week that may influence Dollar sentiment including the monthly FOMC rate announcement. The consensus is that the Federal Reserve will hold interest rates steady at 5.25% but the recent volatility in the U.S bond market reflects the renewed uncertainty surrounding U.S interest rates. At the start of the year, the Fed were expected to start cutting interest rates in the third and further quarters but recent statement from a number of officials indicate that the Fed are likely to maintain a tightening bias amid concerns over rising inflation. Elsewhere, the Dollar may struggle to make any gains this afternoon following the release of the U.S housing report. Existing home sales will be closely watched as investors attempt to gauge the pace of activity in the property market, which has shown few signs of growth in recent months.

Data Released 25th June

U.S 15:00 Existing Home Sales (May)

written by Adam Solomon