Daily Insight

The Pound found some support against the majors yesterday, snapping a two-day losing streak versus the Euro and the Dollar following the release of the Bank of England's quarterly inflation report. The monetary policy committee have lifted UK interest rates on five separate occasions since last August in an attempt to bring inflation back towards the 2.0% target. Consumer price inflation has accelerated to a decade high in the second quarter and the report yesterday seemed to support the view that the BoE would lift UK rates at least once more and ease inflation back towards 2.0% by 2009. The tone and language used in the accompanying statement also indicated that while the "upside risks" to price stability have "diminished somewhat" the rate of inflation won't drop below the 2.0% target in 2008 as previously forecast in May. The Bank of England have the unenviable job of balancing risks to price stability and higher commodity prices against the global turmoil in the equity market, which has increased the cost of borrowing for companies while consumers are forced to shoulder record debts.

The Euro fell 0.5% against the Pound yesterday but continued the upward momentum versus the Dollar following a report on German export growth, which rose by the most in eight months in June. Overseas demand is currently spurring economic growth as sales abroad jumped 2.1% from May and the report will rekindle some optimism that the Euro's dramatic appreciation against the Dollar won't hamper economic expansion. Foreign sales helped propel the German economy to the fastest pace of growth in seven years as unemployment fell to a record low and companies stepped up hiring in order to meet demand from overseas. However, the Euro has gained 10% against the Dollar this year alone and concerns were growing within the ECB that the outlook for export growth remains muted as European goods became less competitive. The Euro may find some support this morning amid the release of the ECB monthly bulletin, which is expected to reiterate the hawkish tone of the press conference last week.

The Dollar declined heavily against the majors yesterday, trading back above 2.0300 versus the Pound while falling to a near-record low against the Euro amid a great deal of uncertainty as the volatility surrounding financial markets intensifies. The U.S currency came under renewed pressure following China's threat to dump U.S treasuries and U.S dollars as bond prices sold off drastically in the aftermath of the report. The news prompted Treasury Secretary, Hank Paulson to make an unscheduled appearance on CNBC to refute fears that the Chinese have the power to influence U.S markets. Even the President, George Bush, felt the need to publicly announce that the U.S economy can cope with market volatility and did not view the threat from the Chinese as serious. However, the decline of the Dollar yesterday can be attributed to a number of factors, not least is the commitment from other Central Banks to continue raising interest rates. A hawkish report from the Bank of England all but guaranteed a further quarter-point rise in UK borrowing costs this year while the ECB held a press conference last week to announce that they plan to lift European rates to 4.25% next month.

Data Released 9th August

EU 09:00 ECB Monthly Bulletin

UK 09:30 Global Trade Balance (June)

- Trade Balance ex EU

U.S 13:30 Weekly Jobless Claims (w/e 28th July)

written by Adam Solomon