Daily Insight

The Pound rallied strongly against the majors yesterday, rising 0.7% versus the U.S Dollar and also rose considerably against the Euro as investors appetite for riskier assets increased as a sense of stability returned to global stock markets. Nevertheless, the UK currency may relinquish some of the gains made against the Dollar this morning amid a host of economic reports. UK house price inflation slowed to a degree in August that suggests demand for property may be cooling following the Bank of England's decision to raise interest rates on five separate occasions over the past year. The report from the Nationwide building society showed that the average cost of a home in the UK rose 9.6% for a year earlier after a 9.9% surge in July with higher borrowing costs making it much more expensive for consumers to repay a record £1.3 trillion debt. The recent turmoil surrounding financial markets stemmed from the losses on U.S subprime mortgages, which may restrain demand for homes over the coming months. The accompanying statement from Nationwide said that the overall extent of the damage to economic growth will depend of the length of the "credit crunch" and the monetary policy response from the Bank of England.

The negative sentiment surrounding the Euro continued yesterday as the single currency paired further losses against the Pound following particularly dovish comments from the chairman of the European Central Bank, Jean-Claude Trichet. The statement threw doubt on whether the ECB will raise interest rates in September as Trichet said that the governing council were not "pre-committed" into tightening monetary policy next month. The Central Bank kept up their recent cryptic stance yesterday as a member of the governing council, Bini-Smaghi, said that the markets had correctly interpreted Trichet's comments. It seems increasingly likely that the ECB are taking a noncommittal stance to properly assess the recent turmoil in credit markets before taking any action on the 6th September meeting. In terms of economic data, the Euro may find some much needed support this morning as the Purchasing Manager's index may show that European retail sales rose for the first time in four months in August.

Despite a fundamental lack of U.S economic data released yesterday, the Dollar came under further pressure versus the Pound, closing well above the $2.00 barrier last night as carry trades rebounded and the Dow Jones recouped almost all of Tuesday's losses. The return of stability in financial markets is likely to weigh heavily on the Dollar as investors turn back to high-yielding currencies while the U.S currency may be losing it's "safe haven" status as the impact from the subprime mortgage crisis may spread to real activity and raise expectations of a U.S rate cut. Nevertheless, the Dollar may find a reprieve this afternoon as U.S economic growth is expected to rebound sharply in the revised estimate for the second quarter. A surge in exports and business investment may propel the economy to an annual pace of 4.1%, the strongest level in over a year, although the outlook for growth in the remainder of 2007 has been clouded as the housing recession restricts access to credit.

Data Released 30th August

UK 09:30 Mortgage Approvals BoE (July)

UK 09:30 Consumer Credit (July)

UK 11:00 CBI Distributive Trades Survey (August)

GER 08:55 Unemployment (August)

U.S 13:30 GDP (Q2 Revised)

U.S 13:30 Initial Jobless Claims (w/e 1st September)

written by Adam Solomon