Daily Insight

The Pound is poised to record its biggest monthly decline since May against the Dollar as the losses in the credit market spread throughout the world and prompted investors to unwind carry trades by selling high-yielding assets. The increased appetite for risk aversion is likely to weigh heavily on the Pound over the coming weeks although the UK currency did close marginally higher against the Dollar last night. Concerns persist that UK banks are reluctant to lend funds to eachother because of the losses related to the U.S subprime mortgage crisis amid reports that the Bank of England released £1.6 billion in liquidity under its "standing facility". That allows commercial banks to borrow funds at 1 percentage point above the benchmark interest rate at 5.75% as Barclays plc claimed that it was forced to use the emergency reserve because of technical problems clearing transactions. In terms of economic data, the Pound found some support following a report that UK banks had approved a higher percentage of mortgages in July than previously forecast. Lenders granted 115,000 loans for house purchases last month and the report suggests that five interest rate increases in a year have yet to deter consumers from adding to the national debt and thusly cool the property market.

Following the increased uncertainty and turmoil surrounding financial markets of late, the focus of attention will fall heavily on the actions and comments from the European Central Bank ahead of the September rate announcement next Thursday. Earlier this month, Jean-Claude Trichet, the President of the Central Bank, issued a statement that said "strong vigilance" would be required to make sure that risks to price stability do not materialize. In each of the prior months to a rate increase, Trichet has used the exact same terminology to signal the ECB's intentions to the market. However, with the losses suffered in European money markets this month, the tone and language used in recent statements appear to be shifting sentiment away from a rate hike in September. Despite signs that credit markets are stabilizing, demand for 3 month loans hit a record high yesterday, which shows that banks are still seeking liquidity and the futures market is therefore pricing in only a 40% chance of an interest rate hike next week. In terms of economic data, the Euro may struggle to make gains against the majors this morning as Eurozone unemployment is expected to remain unchanged in July. While elsewhere, the EC sentiment index may show that consumer and business confidence dipped in August.

The Dollar fell against both the Euro and the Pound yesterday amid speculation that the Federal Reserve Chairman, Ben Bernanke, will signal his reluctance to rescue slumping credit markets ahead of his speech at Jackson Hole this afternoon. The recent turmoil surrounding the U.S subrpime mortgage crisis has seen house prices falling with foreclosures rising and Bernanke's non-committal stance is likely to prompt further Dollar selling. Recent reports have also indicated a softening of the labour market as the weekly jobless claims increased by the highest amount since April. However, a separate report showed that the U.S economy expanded at the fastest pace in over a year in the second quarter led by a surge in exports and business investment. Economic growth was revised up to an annual rate of 4.0% but the outlook for expansion in the second half of the year has soured in recent weeks amid concerns over subprime mortgages and the restricted access to credit.

Data Released 31st August

UK 10:30 Consumer Confidence (August)

EU 10:00 EC Sentiment Index (August)

- Consumer Sentiment

- Business Sentiment

EU 10:00 EC Business Climate Index (August)

EU 10:00 Unemployment (July)

EU 10:00 Flash HICP (August)

U.S 13:30 Personal Income (July)

- Consumption

- Core PCE

U.S 14:45 Chicago PMI (August)

U.S 15:00 Factory Orders (July)

U.S 15:00 Michigan Sentiment (August Final)

written by Adam Solomon