Daily Insight

The Pound remained largely unchanged against the Dollar yesterday, holding steady around the $2.01 level while falling a further 0.1% versus the Euro ahead of the Bank of England interest rate announcement this lunchtime. The monetary policy committee are widely expected to raise UK interest rates by a further 25 basis points in order to rein in inflation, which has recently peaked at the highest level in 10-years. Recent hawkish statements from the a number of policy makers including the governor of the BoE, Mervyn King, have virtually assured investors that rates will rise to a fresh six-year at 5.75%. In addition, that sentiment was further emphasised yesterday as the UK's biggest mortgage provider said that house prices throughout Britain rose at a faster pace than previously estimated in June. While elsewhere, the CIPS services index rose to a reading of 57.7 last month while the inflation component increased from a 15-month low. The nine-strong committee was split 5-4 in favour of holding rates last month with the governor in the minority for the first time in over two years. Therefore, it will be interesting to witness the outcome of the decision and we can expect the Pound to remain elevated if the MPC raise rates for the fifth time in under a year.

The Euro made significant gains against the Pound yesterday, closing under 1.4800 for the first time this week while we also approach a record level versus the ailing U.S Dollar. In terms of economic data, the single currency received a timely boost yesterday as the Purchasing Managers' index showed that growth in the Euro-zone service sector accelerated to the fastest pace in a year in June. The PMI index rose to a reading of 58.3 last month from 57.3 in May as unemployment across the 13 nations sharing the Euro dropped to the lowest level on record. The focus today will fall largely on the ECB interest rate announcement and press conference where policy makers are widely expected to keep rates unchanged in July. The European economy has been expanding at the fastest pace in six years, which has seen the Central Bank lift rates on eight separate occasions since late 2005. However, given the somewhat over reliance of the influence of money supply growth, the ECB are expected to wait for a clearer indication that economic growth is fanning inflation. In addition, the Euro may make further gains against the majors if the chairman, Jean-Claude Trichet, indicates that inflationary pressures remain to the upside and "strong vigilance" will be required over the coming months.

The Dollar plummeted to a fresh 26-year low against the Pound yesterday, peaking at 2.0200 in early trading while the U.S currency also fell considerably versus the Euro following the distinct lack of U.S economic data. The negative sentiment surrounding the Dollar may continue this afternoon, particularly if the Bank of England lift interest rates at midday. Nevertheless, the latest round of economic data may show that growth in U.S service industries probably held close to the fastest pace in over a year last month. The ISM index of non-manufacturing companies may fall modestly to a reading of 58.0 from 59.7 the previous month with a figure above 50 indicating expansion. Elsewhere, the ADP employment report will be watched closely and may provide an insight into the nonfarm payrolls numbers on Friday, which may show that the unemployment rate held steady at 4.5%.

Data Released 5th July

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:15 ADP Employment Report

U.S 13:30 Initial Jobless Claims (w/e 30th June)

U.S 15:00 ISM (Non-Manufacturing) Index (June)

written by Adam Solomon