Daily Insight

The Pound declined against the Dollar and the Euro yesterday as Bank of England policy makers raised UK interest rates for the fifth time in 11-months and to the highest level in six years at 5.75%. The nine-strong monetary policy committee voted that a further 25 basis point hike would be necessary in order to curb inflation, which has stayed way above the 2.0% target and increases the chances of a further quarter-point rise later in the year. UK inflation has risen to the highest level in a decade this year while robust growth in the housing market combined with strong consumer spending has powered the fastest economic growth in three years. In the aftermath of the rate announcement, the governor of the Bank of England, Mervyn King, released a statement that said "risks to price stability still lie to the upside." As a result, the hawkish sentiment from policy makers has raised speculation that UK interest rates will rise to 6% by the end of the year on concerns over rising factory-gate inflation and house price growth. Nevertheless, the Pound declined against the Euro in the aftermath of the announcement and may fall against the Dollar for the second consecutive day amid the release of the monthly U.S job report. Euro and Dollar buyers would be well placed to take advantage of the current rate before further downside movement over the course of the day.

The Euro managed to consolidate on the recent gains made against the Dollar and also rose 0.2% versus the Pound despite the ECB's decision to hold interest rates at 4.0%. The outcome of the meeting was widely anticipated but the focus would fall on the accompanying press conference where the chairman of the ECB, Jean-Claude Trichet, gave a strong indication that interest rates may need to rise further in September to prevent economic growth from fuelling inflation. A number of members from the ECB's governing council have recently stated at the current benchmark lending rate was still low enough to boost economic expansion. The chairman has also been criticised of late for placing too much emphasis on the impact of money supply growth as a gauge of inflationary pressures. In the statement yesterday, Trichet failed to strike the sort of hawkish rhetoric that some investors were anticipating and omitted the term "strong vigilance" from the press conference. The specific tone and language used by the chairman has been the same in each of the prior months to a rate increase and therefore, we expect the ECB to keep rates steady until September.

The Dollar made unexpected gains against the Pound yesterday as growth in the U.S service sector surpassed initial forecasts and accelerated to the fastest pace in over a year last month. The ISM index of non-manufacturing rose to a reading of 60.7 in June from 59.7 the previous month and suggests that the U.S economy will continue to grow at a moderate pace this year. Growth in the service sector, which accounts for nearly 90% of the economy, is supplementing the worst slump in housing for almost 20 years and may keep the Federal Reserve from cutting interest rates over the next 6-months. Elsewhere, the Dollar managed to sustain the early momentum as a separate report showed that ADP employer services added more workers to payrolls than expected in June. The private report, which provides an insight into the non-farm payroll numbers this afternoon, showed that companies added 150,000 new workers to payrolls last month, the biggest monthly increase in seven months. The Dollar may continue to make gains this afternoon ahead of the monthly U.S job report, which is expected to show that wage growth accelerated while the unemployment rate remained unchanged at 4.5%.

Data Released 6th July

UK 09:30 Industrial Production (May)

- Manufacturing Output

GER 11:00 Manufacturing Orders (May)

U.S 13:30 Non Farm Payrolls (June)

- Unemployment Rate

- Average Hourly Earnings

written by Adam Solomon