Daily Insight

The Pound came under some pressure in early trade yesterday, falling sharply against the Euro and also dropping 0.2% versus the Dollar following a disappointing report on the UK property market. The Royal Institution of Chartered Surveyors said that house prices rose at the slowest pace in almost 18-months in June as higher interest rates discouraged first time buyers and weighed heavily on household income. The number of surveyors reporting higher home values throughout Britain outnumbered those showing declines by just 10.6% last month, which represents the lowest reading since January 2006. The Bank of England have raised UK borrowing costs to the highest level in six years with five consecutive rate hikes over the past eleven months in order to rein in consumer price inflation. In a speech this week, a member of the BoE's monetary policy committee, Andrew Sentence, said that growth in the property market and consumer spending may suffer from an economic slowdown after house prices rose by more than 10% over the past year alone. Sentence was one of the four policy makers to actively recommend a rate hike in June prior to this months quarter-point increase as inflation has remained above the 2.0% target for over a year.

The positive momentum surrounding the Euro continued yesterday as the single currency rallied 0.4% against the Pound and also rose to fresh record high versus the U.S Dollar following a host of positive economic reports. The fresh impetus for the Euro began with an unexpected upward revision in European gross domestic product as growth in the economy surged to 3.1% from the this stage in 2006. Following a consistent improvement in business investment and strong export growth, the economy has outperformed initial forecasts in the first quarter. Sales abroad were also revised up to 0.8% from 0.3% in the preliminary estimates, which shows the Euro's dramatic appreciation is doing little to quell demand for Euro-zone exports. The report will fuel speculation that the European Central Bank has the scope to continue raising interest rates although upside risks to price pressures seem fairly muted. Elsewhere, the Euro received a further boost as a separate report on factory activity showed that growth in industrial production continued to accelerate in May.

The Dollar continued to decline heavily against the Euro yesterday, closing towards 1.3800 versus the single currency but made modest gains versus the Pound as equity and bond markets regained some stability following the recent turmoil surrounding subprime mortgage defaults. Nevertheless, the latest round of economic reports continued to weigh on Dollar sentiment as the U.S trade balance showed that the deficit in goods in services widening in May. Following a reported jump in oil prices, the cost of imported goods outpaced record export growth as the gap in trade increased 2.3% to $60 billion. In addition, the Dollar may continue to decline this afternoon as a report on U.S retail growth is expected to show that sales probably fell in June following the biggest gain in over a year the previous month.

Data Released 13th July

U.S 13:30 Retail Sales (June)

U.S 13:30 Export Prices (June)

- Import Prices

U.S 15:00 Michigan Sentiment (July Prelim)

U.S 15:00 Business Inventories (May)

written by Adam Solomon