Daily Insight

The dramatic appreciation of the Pound continued yesterday as the UK currency rallied to a fresh 26-year against the Dollar and also rose 0.4% versus the Euro following a stronger-than-expected report on UK inflation. Consumer prices increased 2.4% year-on-year in June, which was the lowest in eight months, after gaining 2.5% in May but initial expectations had led some investors to price in a more substantial fall towards 2.3%. The Bank of England have raised the benchmark lending rate on five occasions since August last year, taking interest rates to the highest level in six years at 5.75% in order to bring inflation back towards the 2.0% target. However, the price of crude oil has increased 14% from the start of June and is holding above $70 a barrel, the highest price in almost a year. In addition, a separate gauge of the report showed that the retail price index, which includes mortgage payments, rose 4.4% in June compared with 4.3% the previous month and suggests that the Bank of England will need to continue raising interest rates in the near-term. As a result, the Pound has strengthened to trade above 2.0500 against the Dollar this morning and has also risen well above 1.4800 versus the Euro ahead of the minutes from the Bank of England's last policy meeting.

The Euro failed to capitalise on the sustained Dollar weakness yesterday and also fell significantly against the Pound as German investor confidence fell by the most in 10 months in July. The ZEW Centre for European Economic Research said its index of investor expectations fell to a reading of 10.4 this month, the lowest level since March, as the Euro's dramatic appreciation against the Dollar weighs heavily on export growth. The single currency has recently rose to the strongest level on record against the U.S currency and concerns are growing within the ECB that growth in Euro-zone exports, which has propelled the economy to the fastest pace of expansion since 2000, will continue to decline. In addition, rising oil prices and credit costs are squeezing producer prices and that may prompt the ECB to raise borrowing costs beyond 4.0% in order to contain inflation.

The Dollar dropped to a fresh 26-year low against the Pound yesterday and investors are anticipating further losses in the near-term amid a mixture of sub-par U.S economic data and hawkish sentiment from the Bank of England. The decline of the Dollar continued to gather momentum yesterday as the U.S currency fell to 2.0500 versus the Pound despite robust growth in the manufacturing sector as factory production rose above initial forecasts. Elsewhere, the headline TICs numbers also exceeded expectations on a record inflow of foreign investment in May, which supplements the surprising rise in the U.S trade deficit over the same period. Nevertheless, the Dollar failed to find any support as a report on producer prices showed that factory-gate inflation slowed in the month of June, reaffirming suggestions that the Federal Reserve can hold rates for the remainder of the year. The report may provide an insight in the consumer price index later today, which is also expected to remain relatively soft last month.

Data Released 18th July

UK 09:30 Claimant Count Unemployment (June)

UK 09:30 Average Hourly Earnings (3 months to May)

UK 09:30 BoE MPC Minutes July 4th/5th Meeting

EU 10:00 Trade Balance (May)

U.S 13:30 Real Earnings (June)

U.S 13:30 Consumer Price Index (June)

U.S 13:30 Housing Starts (June)

written by Adam Solomon