Daily Insight

The Pound rose to yet another 26-year high against the Dollar yesterday, rising 0.3% on the session before easing back towards 2.0620 by the close of trading last night. The UK currency also made strong gains versus the Euro and briefly traded above 1.4925 for the first time since February despite an unexpected drop in the CBI Industrial trends survey. The quarterly report showed that UK industrial output dropped back into negative territory this month as the overwhelming appreciation of the Pound begins to hamper overseas demand. Nevertheless, Sterling continued to rally against the majors on increased speculation that the Bank of England look set to raise interest rates for the sixth time in twelve months in August. Despite, the less hawkish voting pattern of the most recent monetary policy meeting and the weakness of recent economic reports, the Pound has remained resilient, rising to the highest level against the Dollar since June 1981. Some investors will argue that the prospect of UK rates rising to 6.0% is already well factored in to current market movement and therefore the recent strength of the Pound can be attributed to merger and acquisition flow.

The Euro rose to another record high against the ailing U.S Dollar yesterday but fell a further 0.2% versus the Pound as growth in the Europe's manufacturing and service industries slowed more than initial forecasts in July. Growth in the sectors, which accounts for two thirds of the economy, accelerated despite the Euro's dramatic appreciation against the Dollar this year and significantly higher oil prices. The combined Purchasing Managers' index fell to a reading of 57.3 from 57.8 in June with a figure above 50 indicating expansion. However, the Euro's 7% surge against the Dollar this year has eroded the competitiveness of European export, which have previously driven the economy to the fastest pace of expansion in seven-years. In addition, rising oil prices may also weigh on domestic spending and help cool economic growth, which may well have an influence on the ECB's monetary policy.

The sustained and unrelenting decline of the U.S Dollar continued yesterday but there are signs this morning that Cable may have peaked above 2.0600 yesterday as the market fell sharply below that level overnight. The Dollar has also fallen to a fresh record low against the Euro over the past trading session and may struggle to make any significant gains this afternoon amid fears over the impact of the turmoil in the U.S subprime mortgage and credit markets. In terms of economic data, the Dollar may come under further pressure today following the release of the latest round of U.S housing data. Existing home sales probably fell for the fourth consecutive month in June as the worst slump in over 17-years continues to show few signs of abating. Sales of previously owned homes are expected to fall to an annual rate of 5.86 million last month, the lowest level since April 2003 as higher interest rates are declining home values discourage buyers.

Data Released 25th July

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

U.S 19:00 Fed Beige Book Published

written by Adam Solomon