Daily Insight

Following on from last week, the Pound suffered its biggest weekly fall in over two years against the Dollar, plummeting through the $2.00 barrier to trade as low as 1.9750 amid increased appetite for risk aversion that continues to weigh on the higher-yielding currencies. In addition, the downward momentum surrounding the Pound continued following the release of the minutes from the Bank of England's last policy meeting, which showed that the monetary policy committee had voted unanimously to hold UK interest rates this month. The language used in the report seemed to strike a dovish tone from the nine-strong committee as the Central Bank stated that they had "no firm view on whether rates would need to rise further". Elsewhere, the latest round of consumer price data showed that inflation had moderated to 1.9% year-on-year last month and recorded the biggest monthly fall in five years. The UK rate of inflation had settled under the Bank of England's 2.0% target for the first time since March 2006 and suggests that the Central Bank won't need to raise interest rates beyond 5.75%. The Pound looks set to remain vulnerable against the Dollar this week and may continue to decline as a report from Rightmove plc showed that London house prices fell for the first time in a year.

The Euro remained largely unchanged against the Pound and the Dollar on Friday as some stability returned to European money markets following the ECB's decision to inject an unprecedented amount of funds on Tuesday to prevent a liquidity crisis. Initially, the single currency declined heavily against the Dollar amid suggestions that the ECB will refrain from raising interest rates next month as stock markets tumble and concerns deepen that the credit crunch sparked by the U.S subprime mortgage crisis will cub economic expansion. In terms of economic data, the focus this week will on the German ZEW index of investor sentiment, which is expected to show that the headline measure fell again in August. However, the index has recently proved itself to be poorly correlated with surveys based on real activity and investors are likely to pay more attention to the Purchasing Managers' index of European manufacturing and service sector growth.

The positive momentum surrounding the Dollar gathered pace last week as the U.S currency dropped under the $2.00 level versus the Pound for the first time in six weeks amid the turmoil in financial markets, which led investors back towards relative "safe haven" currencies including the Dollar and the Yen. By the close of trading on Friday, the Dollar had relinquished some gains against Sterling and had also fell versus the Euro amid reports that the U.S Federal Reserve had cut the prime discount rate to 5.75% from 6.25% in response to deteriorating market conditions. As a result, the Euro found some support and U.S stocks rallied sharply, although selling pressures could resume if markets fail to stabilize this week. Amid the increased uncertainty in equity and bond markets, the host of U.S economic data was largely ignored as a gauge of U.S consumer sentiment showed that confidence in the economy had dropped to the lowest level in a year this month.

Data Released 20th August

U.S 15:00 Leading Indicators (July)

written by Adam Solomon