Daily Insight

Following on from last week, the Pound rose significantly against the Dollar and managed to consolidate well above the $2.00 level on Friday following a barrage of strong economic reports that seemed to increase the chance of an interest rate hike this week. The final estimate of UK gross domestic product showed that the economy grew faster than anticipated in the first quarter following sustained growth in the service sector and increased government spending. The annual pace of economic growth rose 3% from this stage in 2006, which was slightly ahead of expectations and provides an indication that higher interest rates have yet to cool the economy. The focus this week will fall largely on the Bank of England rate announcement this Thursday where the monetary policy committee are likely to increase borrowing costs to a fresh six-year high. The governor of the BoE, Mervyn King, was narrowly outvoted for the first time in over two years for a June increase and following a number of hawkish statements over the past month, policy makers may well lift rates for the fifth time in eleven months. As a direct result of the speculation surrounding a July rate hike, the Pound has risen above the $2.01 level this morning as we approach the highest level in 26-years versus the U.S currency. Dollar buyers would be well placed to take advantage of the current rate or at least place a stop order in the market to protect against an adverse move should the MPC hold rates again this month.

The Euro managed to hold firm against the Pound on Friday and rose to a 3-week high versus the Dollar as the EC sentiment index showed that European business and consumer confidence stayed close to a six-year high in June. The labour market has strengthened significantly over the past year with unemployment currently at a record low while global growth has spurred European exports to drive the economy to the fastest pace of expansion since 2000. The index of sentiment eased slightly to a reading of 111.7 in June from a revised 112.1 the previous month while inflation stayed under the ECB's 2.0% ceiling for another month. As a result, the European Central Bank are widely expected to hold interest rates at 4.00% on Thursday but we will be paying close attention to the accompanying statement. The tone and language used by the chairman of the ECB will be heavily scrutinized in the aftermath of the announcement in order to gauge the likelihood of further monetary tightening over the coming months. In terms of economic data, the Euro may remain firm against the majors this morning as the Purchasing Managers' index is expected to show that growth in European manufacturing accelerated in June.

The Dollar continued to decline against the Pound last week and also fell considerably versus the Euro following a barren run of economic data. U.S consumer spending rose less than forecast in May while the Federal Reserve's preferred gauge of inflation increased at the slowest pace since March 2004. Personal spending rose just 0.5% from the previous month while core prices barely increased, which suggests that U.S inflation will continue to moderate and increase speculation that the next likely move from the Fed will be a cut in interest rates towards the end of the year. In terms of economic data, the Dollar may struggle to rebound against the majors as June's non-farm payrolls report takes centre stage. The monthly U.S job report is expected to show that the economy added 118,000 new jobs to payrolls in June, which is slightly below the average for the past five months while the unemployment rate may stay unchanged at 4.5%.

Data Released 2nd July

UK 09:30 CIPS Manufacturing Survey (June)

EU 09:00 PMI Manufacturing (June)

U.S 15:00 ISM Manufacturing (June)

written by Adam Solomon