Daily Insight

The Dollar failed to capitalise on the recent gains made against the Pound, falling 0.1% over the course of the day while the U.S currency remained largely unchanged versus the Euro following a report on the Federal Reserve's preferred measure of inflation. U.S personal spending increased at the slowest pace in nine months in June while the consumption expenditures index rose just 0.1% as slowing economic growth eases price pressures. The report yesterday will be of concern to policy makers within the Federal Reserve, particularly when you consider that consumer spending accounts for more than two thirds of the economy and has recently supplemented the dramatic slowdown in the housing sector. Nevertheless, robust growth in the labour market combined with rising incomes will prevent spending from slowing even further, a sentiment that was echoed yesterday by a separate market report. U.S consumer confidence climbed more than initial forecasts for July, rising to the highest month-on-month increase in nearly six years following low unemployment and a recent retreat in fuel costs. The Dollar may receive a boost this afternoon amid the release of the ISM manufacturing report, which is expected to show that growth in the sector expanded at close to the fastest pace in more than year last month.

The Euro lost further ground against the Pound yesterday and also came under moderate pressure versus the Dollar as European business and consumer confidence fell by more than expected in July. The EC sentiment index declined to a reading of 111.0 from 111.7 in June as higher oil prices over that period combined with a strong Euro threatens the pace of economic expansion. In addition, a separate report showed that a measure of consumer price inflation slowed to 1.8% this month from 1.9% in June and suggests that the ECB won't need to tighten interest rates in the short-term as price pressures continue to moderate. However, the European economy is expected to expand at roughly 2.6% this year, which is largely in line with expectations and close to the fastest pace in six years achieved in 2006. In terms of economic data, the Euro may continue to decline this morning as the Purchasing Managers' index of European manufacturing is expected to show that growth in the sector eased in July to a reading of 54.8 from 55.6 the previous month.

The recent negative sentiment surrounding the Pound has continued to gather momentum this morning with the UK currency declining against the Dollar and the Euro as traders reduced so-called carry trades on signs that the U.S subprime mortgage crisis is spreading. However, the Pound was the only high-yielding currency to make modest gains against its U.S counterpart yesterday as the FTSE saw the biggest gain in 14-months on speculation that the UK's seventh biggest bank could receive a buyout offer from the National Bank of Australia. In terms of economic data, the Pound stood firm despite a damning report on UK consumer confidence while a separate report from the Confederation of British Industry showed that the industrial trends survey also dropped for August. The Pound may continue to decline against the majors over the course of the day as the CIPS manufacturing survey is expected to show that growth in the sector moderated in July.

Data Released 1st August

UK 09:30 CIPS Manufacturing Survey (July)

UK 10:30 BRC Shop Prices (July)

U.S 13:15 ADP Employment Report (July)

U.S 15:00 ISM (Manufacturing) (July)

U.S 15:00 Pending Home Sales (June)

written by Adam Solomon