Daily Insight

The renewed optimism for the Pound was severely tested yesterday as the UK currency failed to sustain the momentum against the Dollar and dropped 0.6% by the close of trading last night, the biggest one-day loss in over two months. The Pound has risen to a fresh 26-year high against the Dollar for the past six consecutive trading sessions amid concerns over the turmoil in the U.S subprime mortgage and credit markets. In addition, the Pound has managed to make gains despite a relatively mixed-bag of UK economic data and a less hawkish report from the monetary policy committee. However, the Pound fell considerably yesterday amid concerns that the problems in the U.S subprime mortgage sector could spill over to other economies and that has prompted speculation that Pound's historic rally against the Dollar may have peaked. Nevertheless, the Pound did manage to make further gains against the Euro yesterday and has remained towards the upside this morning despite a report on the UK housing market, which showed that prices rose at the slowest pace in fifteen months. The Nationwide index follows an earlier report from Rightmove plc with the average cost of a home in the UK rising just 0.1% in June.

The Euro has appreciated to a record high against the Dollar this week but by the close of trading last night had fallen 0.9% on the session to represent the biggest one day loss in over five months. Recent commentaries on the slowdown of the U.S economy seems to suggest that decline of the Dollar has been to this point, "over-done" with the belief that the market is over-reacting to the subprime mortgage crisis. Therefore, the Euro may continue to decline this morning following a report on the German Ifo Business climate index, which showed that confidence fell for a second consecutive month in July. The Ifo sentiment index fell to a reading of 106.4 from 107.0 in June and is just the latest indication that growth in Europe's largest economy is losing momentum. The Euro has appreciated 7.0% against the Dollar this year alone and combined with rising oil prices, growth in the German economy may have peaked.

The Dollar rebounded sharply yesterday, making robust gains against both the Pound and the Euro despite a report on the U.S housing sector, which showed that home resales fell for a fourth straight month in June. Purchases of existing homes declined 3.8% to an annual rate of 5.75 million, the slowest pace since November 2002, as the worst slump in housing since 1990 continues to hamper U.S economic growth. Nevertheless, the Dollar continued to rally against the Pound and the Euro in the aftermath of the report, leading to speculation that the sharp and overwhelming decline of the U.S currency may have been exaggerated. In terms of economic data, the Dollar may remain resilient today as a separate report on the housing sector is expected to show that the sales of new homes fell for the third consecutive month in June. Elsewhere, the Dollar may even find some support as orders for U.S durable goods increased by 1.9% in June, the most in three months amid increased business investment.

Data Released 26th July

EU 09:00 Ifo Business Climate Index (July)

EU 09:00 M3 (June)

- 3 month moving average

U.S 13:30 Initial Jobless Claims (w/e 21st July)

U.S 13:30 Durable Goods Orders (June)

U.S 15:00 New Home Sales (June)

written by Adam Solomon