Daily Insight

The Pound rose back above the $2.00 level yesterday for the first time in over a week versus the U.S Dollar as a sense of stability returned to financial markets and investors raised bets that the Bank of England will lift UK interest rates over the coming months. The Pound climbed 0.6% against the Dollar last night and also made gains versus the Euro amid reports that the risk of owning corporate bonds in Europe fell to the lowest level in over a month. The speculation surrounding UK monetary policy has been supportive for Sterling as the market anticipates a further rise to 6.0% by the turn of year after a spate of positive economic reports showed a pick-up in UK manufacturing and increased business investment. The renewed sentiment for the Pound may continue this morning following the release of the revised estimate of UK gross domestic product, which is expected to show that economic growth remained largely unchanged in the second quarter.

Despite the recent uncertainty surrounding global financial markets, the European Central Bank still plans on raising interest rates next month despite injecting almost €40 billion into European money markets to avert a liquidity crisis. A press release yesterday showed that the governing council still held the same monetary stance as previously expressed by the chairman, Jean-Claude Trichet, on the 2nd August. In the press conference that followed the August rate announcement, Trichet expressed concerns over rising prices and was adamant that policy makers needed to exercise "strong vigilance", which prepared the market for a September rate hike. The Euro has rallied strongly against the Dollar and other low yielding currencies but failed to make gains versus the Pound. The single currency may also struggle this morning amid reports that growth in European manufacturing and the service sector probably slowed in August.

The Dollar came under increased pressure against the Pound yesterday, falling for a third consecutive trading session as appetite for risk aversion subsided and some stability returned to credit and bond markets. In terms of economic data, the market largely ignored the weekly jobless claims, which showed that first-time applications for unemployment benefits fell by almost 2,000 in the week ending 18th August. Rising business investment and strong demand from overseas is prompting U.S companies to retain workers and the report yesterday provides the latest indication that the strength of the labour market will supplement the widening credit crunch. Elsewhere, the Dollar may continue to decline against both the Pound and the Euro this afternoon amid the release of the latest housing report. New home sales are expected to drop to the lowest level in seven years for July, showing a worsening housing recession that threatens to curb U.S economic growth.

Data Released 24th August

EU 09:00 Flash Manufacturing PMI (August)

- Flash Services PMI

UK 09:30 GDP (Q2 Revised)

U.S 13:30 Durable Goods Orders (July)

U.S 15:00 New Home Sales (July)

written by Adam Solomon