Daily Insight

Following on from last week, the turmoil surrounding financial markets has continued to dominate and the Pound has resumed the downward momentum against the Dollar amid speculation that the so-called carry trades will continue to unwind. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which has traded sharply lower over the past couple of sessions. The increase in volatility has prompted investment from high yielding currencies back into "safe haven" currencies including the U.S Dollar, which has risen 2.6% against the Pound over the past ten days alone. In addition, there is a host of key economic data released in the UK this week that could potentially sway monetary policy with the minutes from the BoE's last policy meeting taking centre stage. Following the release of the Central Bank's quarterly inflation report last week, policy makers may retain a tightening bias after confirming that interest rates are likely to rise to 6.0% by the turn of the year. Elsewhere, the latest round of inflation data will prove pivotal as UK consumer prices are expected to fall to the lowest level in over a year in July as five interest rate increases in under a year begin to slow the economy.

The Euro plummeted against the Dollar last week and also made further losses versus the Pound amid news that the European Central Bank would provide unlimited funds below the 4.0% base rate to avoid a liquidity crisis. As a result, treasuries rose and European money markets surged and that trend looks set to continue in the short-term as the ECB injects a further €47 billion into the market for a third consecutive trading day. Investors are demanding compensation in the form of higher yields after further losses in bonds backed by subprime mortgages continues to spread to other markets and threatens to curtail lending. In terms of economic data, the Euro may find some support against the majors this week amid the release of the flash estimates for Euro-zone GDP in the second quarter. The report is expected to show that growth slowed modestly to 0.6% although the year-on-year rate is still above trend at 2.7% and therefore supports the case for higher interest rates.

The renewed appetite for the Dollar looks set to gather momentum this week amid a packed schedule of U.S economic data while the continued uncertainty surrounding the financial markets is attracting investors back to the U.S currency. Following comments from the Federal Reserve last week that inflation remains the overriding concern to policy makers, the latest round of CPI data is expected to remain above 2.0% and keep the Fed from cutting rates this year. Meanwhile, the Dollar may also find some support this afternoon amid the release of the latest round of retail data, which is expected to show that sales in the U.S rose in July. The report may illustrate that consumer spending is moderating slightly while the housing recession persists as sales rise 0.2% following a 0.9% collapse in June.

Data Released 13th August

UK 09:30 DCLG House Prices (June)

UK 09:30 Producer Price Index (June)

U.S 13:30 Retail Sales (July)

U.S 15:00 Business Inventories (June)

written by Adam Solomon