Daily Insight

The gradual but unrelenting decline of the U.S Dollar continued in earnest yesterday as the U.S currency fell to yet another record low against the Euro and also dropped to a fresh 26-year low versus the Pound. The significant Dollar weakness can be attributed to a number of factors, not least the diverging expectations on monetary policy as global Central Banks look set to continue raising interest rates. Whereas, the Federal Reserve have provided a strong indication that the next likely move is a cut in U.S borrowing costs, which currently stand at 5.25%. In addition, the Dollar has been hampered by the turmoil in the U.S subprime mortgage and credit markets and with the weakness in the housing market showing few signs of subsiding, we can expect the Dollar to remain under constant pressure over the course of this week. Therefore, the focus in terms of economic data will be the existing and new home sales reports on Thursday, which are both expected to show to show that worst slump in the U.S housing market for nearly twenty years is showing few signs of abating.

Although the Euro has risen to yet another record level against the Dollar, the single currency has come under significant pressure versus the Pound as we approach a week of key activity and sentiment surveys in the Euro-zone. The Euro may find little support this morning as the Flash estimate for European manufacturing is expected to show that expansion in the sector slipped in July but remains at a level consistent with a robust pace of growth. Elsewhere, the Purchasing Managers' index on the Euro-zone service sector, which accounts for the largest proportion of the economy, is also expected to slip from a reading of 58.3 in June. Later this morning, a separate report on the condition of European factory production may show that industrial orders rose 1.1% on the month in May. The report is just the latest indication that a strong Euro is doing little to weigh on overseas demand although the Ifo sentiment index on Thursday should provide a broader measure of growth.

The Pound surged to yet another high against the Dollar yesterday, closing last night above 2.0600 while the UK currency also managed to make significant strides forward versus the Euro despite a weaker-than-expected report on the housing market. UK house prices rose at the slowest pace this year in June as the Bank of England raised interest rates to the highest level in six years to 5.75%. However, the Pound remained resilient in spite of the report and even made some gains amid news that one of China's state owned banks bought a 3.1% stake in Barclays plc. In addition, the positive sentiment surrounding the Pound has been bolstered on strong speculation that the Bank of England will lift UK interest rates to 6.0% as early as next month to offset the risks of inflation. In terms of economic data, the focus this morning will fall on a report from the Confederation of British Industry, who are expected to report strong numbers in the quarterly trends survey for the second quarter.

Data Released 24th July

UK 11:00 CBI Quarterly Trends Survey (Q2)

EU 09:00 Flash PMI - Manufacturing (July)

EU 09:00 Flash PMI - Services (July)

EU 10:00 Industrial Orders (May)

U.S 15:00 Richmond Fed Survey (July)

written by Adam Solomon