Daily Insight

The Pound advanced to a fresh 26-year high against the Dollar yesterday, trading as high as $2.0207 on expectations that the Bank of England are poised to raise UK interest rates tomorrow and signal further increases over the coming months. Elsewhere, the Pound stood 0.1% higher against the Euro by the close of trading last night as investors speculate that policy makers will lift rates to 6.00% by year-end as inflationary pressures remain to the upside. The Pound has gained 3.1% against the Dollar this year with the support for the UK currency based largely on the divergence in interest rate outlooks between the UK and the U.S. The monetary policy committee has raised rates twice this year while the Federal Reserve have left borrowing costs on hold at 5.25%, which has sent the Pound to the highest level against the Dollar since June 1981. In terms of economic data, UK house prices accelerated faster than expected in June as the average cost of home rose 0.4% following a 0.3% increase in May. The report will only fuel expectations of an interest rate hike tomorrow as growth in the housing market continues to gather momentum despite rising borrowing costs. Elsewhere, the Pound may continue to make gains against the Dollar and the Euro this morning as the CIPS services survey may show that growth in the sector continued to expand.

The Euro fell modestly against the majors yesterday dropping 0.1% versus both the Pound and the Dollar as a spate of economic reports came out largely in line with initial forecasts. Euro-zone unemployment remained largely unchanged from the previous month as the jobless rate held steady at 7.1% while a gauge of producer price inflation showed that prices rose 0.3% on the month in May. The single currency may find some support this morning as the Purchasing Managers' index on Euro-zone service sector growth is expected to follow the recent manufacturing survey. Growth in services, which accounts for the largest proportion of the economy, is forecast to accelerate to a reading of 58.3 from 57.3 in April with a figure above 50 indication expansion. However, the Euro may struggle to make any further gains as a separate report may show that European retail sales failed to advance in May as rising interest rates and higher fuel prices threatens the pace of consumer spending.

The Dollar plummeted to a fresh 26-year low against the Pound yesterday as U.S durable goods orders fell less than anticipated in May with orders falling 0.5% from April. The report from the Commerce department reiterated that a pick-up in business investment will be necessary over the coming months in order to help the economy supplement the lingering slump in the property market. Elsewhere, a separate report showed that Pending home sales of previously owned properties unexpectedly declined in May as first-time buyers struggle with higher lending rates. The index of purchase agreements dropped a further 3.5% to a reading of 97.7, which represents the lowest level in over five years. The report follows recent data that suggests the slump in housing, which threatens to curtail the pace of economic expansion, is showing few signs of abating going into the third quarter. Dollar buyers would well placed to work a moving a stop order in the market to product against a retracement back towards the $2.00 level.

Data Released 4th July

UK 09:30 CIPS Services Survey (June)

EU 09:00 PMI Services (June)

E.U 10:00 Retail Sales (May)

written by Adam Solomon