Daily Insight

Following on from last week, the Pound rose to the highest level in 26-years against the ailing U.S Dollar as the Bank of England raised UK interest rates for the fifth time in under a year and to the highest level since 2001. The nine-strong monetary policy committee, led by the governor of the Bank of England, Mervyn King, elected to lift rates to 5.75% in order to bring inflation back towards the 2.0% target. The Pound rallied strongly in the build up to the announcement, rising to the strongest level since June 1981 on speculation that the MPC would need to lift rates once more before the turn of the year. An index of factory-gate inflation stayed close to the highest level since 1999 last month while recent surveys suggest that house price growth will continue to expand at a robust pace. Therefore, the focus this morning will fall largely on the latest round of producer price inflation, which is expected to show that output prices rose to annual rate of 2.6% last month. Elsewhere, the UK global trade balance may show that the deficit in goods and services narrowed from £6.3 billion in April to £6.00 billion in May.

The Euro rose to a near record high against the Dollar last week and also made gains versus the Pound despite the ECB's decision to leave European interest rates on hold at 4.0%. However, in the accompanying press conference, the chairman of the European Central Bank, Jean-Claude Trichet, signalled that the governing council are prepared to raise the benchmark lending rate for the ninth time in under two years with the next likely rise coming in September. The tone and language used in the statement seemed to suggest that the Central Bank remains adamant that borrowing costs are still low enough to propel economic growth while policy makers must "act in a firm and timely manner to ensure that risks to price stability do not materialize." The hawkish stance from the ECB can be derived from the renewed confidence in the German economy and a host of economic reports this week will underline the performance of Europe's largest economy. The Euro has remained firm against the majors this morning despite a surprisingly negative report on German export growth, which unexpectedly fell in May. Sales abroad declined 0.7% from a revised 0.9% rise in April and the report is just the latest indication that growth in the German economy may have peaked.

Following on from last Friday, the Dollar had found some support against the majors and managed to claw back some significant gains against both the Euro and the Pound following the release of the monthly U.S job report. Employers added 132,000 workers to payrolls in June while average hourly earnings accelerated and unemployment held near the lowest level in six years. The increase in employment followed a larger than expected gain in May and the report provides an indication that the U.S job market will continue to support economic growth amid the worst slump in housing for over 17-years. Growth in personal income is boosting consumer spending in the wake of near-record fuel prices and falling home values while host of retail data this week is expected to underline that sentiment. U.S retail sales is expected to show that the annual pace of growth accelerated from 4.5% in May to 5.2% in June as the report provides an insight into the pace of personal consumption in the second quarter.

Data Released 9th July

UK 09:30 Producer Price Index (June)

UK 09:30 Global Trade Balance (May)

GER 11:00 Industrial Production (May)

written by Adam Solomon