Daily Insight

The Pound rose modestly against the Dollar yesterday and also made significant gains versus the Euro following a report on producer prices, which showed that UK factory-gate inflation rose for a seventh consecutive month. One of the primary concerns within the Bank of England's monetary policy committee has been the consistent increase in producer prices, which are thusly feeding through to the already elevated inflationary pressures. Output prices climbed 0.2% last month following robust growth in May after a significant rebound in the price of oil and higher food costs. The report will only serve to increase speculation that the Bank of England will need to raise UK interest rates to 6.0% by the end of the year in order to bring inflation back towards target. Elsewhere, a speech from MPC member, David Blanchflower, did little to dampen Sterling sentiment as he stated at a conference in Berlin that growth in personal income is currently showing few signs of stoking inflation. His comments yesterday will provide an insight into the minutes from the Bank of England's last policy meeting after Blanchflower opposed a rate hike in June. In terms of economic data, the focus this morning will fall on a report from the British Retail Consortium, which is expected to show that UK retail sales remained strong last month.

The Euro remained largely unchanged against the Dollar yesterday but fell a further 0.3% versus the Pound despite a host of positive economic reports coming out of Europe's largest economy. The German trade surplus increased to 17.5 billion in May following an unexpected drop in Euro-zone exports, which provides an indication that growth in the economy may have peaked. Following the Euro's 10% appreciation against the Dollar this year combined with slowing global economic growth, demand for German based goods may be slowing, which threatens to curtail the fastest pace of expansion in nearly seven years. Nevertheless, a larger drop in German imports drove the overall trade surplus higher while a separate report on industrial production fell in line with initial expectations.

Following a sparse supply of economic data, the Dollar fell 0.2% against the Pound by the close of trading last night and thusly failed to consolidate on Friday's robust non-farm payrolls numbers. Dollar sentiment has been further hampered by renewed speculation that the Federal Reserve will keep U.S interest rates on hold for the remainder of the year ahead of today's speech by Federal Reserve Chairman Ben Bernanke. The topic of the conference should centre around inflation and with oil prices holding solidly above $70 a barrel, the risks to price stability seem to clearly skewed to the upside. Depending on the tone and language used in the statement, the Dollar may find some support as Benernake carefully emphasises that inflation remains the single biggest concern to policy makers in cutting rates this year. A recent survey on the U.S economy has reflected that sentiment as growth will continue to gather momentum this year without stoking inflation.

Data Released 10th July

U.S 15:00 Wholesale Inventories (May)

written by Adam Solomon