Daily Insight

The rapid and sustained decline of the Dollar reached fever pitch last week as the U.S currency fell to a fresh 26-year low against the Pound while also falling to weakest level on record versus the Euro amid a host of negative economic reports. On Friday, a report from the Commerce Department showed that U.S retail sales fell by more than anticipated last month as the worst slump in the housing sector for 16-years eroded demand. Sales dropped 0.9% on the month in June, the most in over 2 years, following a revised 1.5% increase in May. U.S economic expansion has been quite overly reliant on consumer spending over the past year considering the sustained downturn in housing and factory production. The focus this week is likely to fall on a testimony from the chairman of the Federal Reserve, Ben Bernanke, who is due to address both houses of Congress on Wednesday and Thursday. The tone and language used in the statement is likely to centre around the consequences of the slump in housing and the implications on wider growth prospects. In terms of economic data, Dollar sentiment may be further compromised this afternoon following the release of the Empire state index, which is expected to show that manufacturing in the New York region slowed this month.

The Euro rose to the highest level on record against the Dollar last week but remained fairly muted versus the Pound despite an unexpected upward revision in European economic growth. The economy surged to 3.1% from this stage last year following increased business investment and strong export growth as sales aboard were also revised up to 0.8% from 0.3% in the preliminary estimates. Growing concerns from the a number of ECB policy makers has been the effects of a strong Euro on demand for European based goods as export growth propelled the economy to expand at the fastest pace in seven years. In terms of economic data, there is a sparse supply of reports released in the Euro region this week with the focus falling on the German ZEW expectations balance on Tuesday.

The Pound continued to surge forward against the Dollar last week and also remained fairly strong versus the Euro amid increased speculation that UK interest rates would rise to 6.0% by the end of the year. In addition, recent economic reports have fuelled concerns that the Bank of England will need to continue raising borrowing costs as factory-gate inflation continues to accelerate while the latest round of housing data showed that prices rose beyond expectations. Therefore in terms of economic data, the markets will be paying particular attention to the CPI report tomorrow, which is expected to show that UK consumer price inflation probably fell to the lowest level since May 2006 last month. Consumer prices may rise just 2.3% from a year earlier, the second consecutive decline in two months and show that the Bank of England are successfully bringing inflation back towards the 2.0% target following five interest rate hikes in under a year.

Data Released 16th July

UK 09:30 DCLG House Prices (May)

EU 10:00 Final HICP (June)

U.S 13:30 Empire State Index (July)

written by Adam Solomon