Daily Insight

Following on from last week, the Dollar fell marginally lower against the Pound by the close of trading on Friday but rose 0.1% versus the Euro following a particularly positive report on U.S durable goods orders. American companies increased corporate spending in July as orders climbed 5.9%, which was significantly more than initial forecasts and the biggest month-on-month increase since September. Elsewhere, a separate report showed that there are signs of stability returning to the U.S housing market before this month's subprime mortgage crisis. The sales of new homes unexpectedly rose 2.8% in July to an annual pace of 870,000 amid speculation that home sales are likely to show renewed weakness as the turmoil in credit markets pushes many mortgage lenders into administration. As the turmoil surrounding financial markets began to subside and some stability returned to trading, the Dollar came under renewed pressure versus the Pound and closed back above the $2.00 level last week. In terms of economic data, the U.S currency may continue to struggle this afternoon amid the release of consumer confidence data, which is expected to show that sentiment fell from a reading of 112.0 in July to 105.0 in August.

The Euro remained largely unchanged against the Pound last week but was down marginally versus the Dollar as growth in European manufacturing and service industries unexpectedly slowed in August. The preliminary estimate of the EC sentiment index seemed to suggest that the pace of orders had slowed this month while the turmoil in global credit markets may be starting to weigh on the European economy. Manufacturing orders increased at the slowed pace since November 2005 as the Euro's dramatic appreciation against the Dollar cooled demand from overseas while economic growth in the Euro-region had slowed more than forecast in the second quarter. Nevertheless, the uncertainty surrounding bond and equity markets combined with slowing economic growth is unlikely to affect monetary policy as the ECB stood resilient in their plans to raise interest rates in September. However, the Euro came under increased pressure against the majors yesterday after the chairman of the Central Bank, Jean-Claude Trichet, appeared to revise his earlier stance and stated that the governing council was not "pre-committed" to raising interest rates next month.

The Pound bounced back strongly against the Dollar last week as appetite for risk aversion abated and investors looked to higher-yielding currencies amid a sense of stability returning to financial markets. In addition, the Pound found further support and rose briefly above 2.0100 versus the Dollar amid reports that the UK economy had accelerated in the second quarter. Gross domestic product increased 0.8% from the previous quarter, driven by increased consumer spending and business investment as the economy heads for the best period of growth in three years. The Pound rallied amid speculation that strong manufacturing data and faster economic growth will convince the Bank of England to raise UK interest rates to 6.0% by the end of the year.

Data Released 28th August

EU 09:00 M3 / Money Supply

GER 09:00 Ifo Business Climate Index (August)

U.S 15:00 Consumer Confidence (August)

U.S 19:00 FOMC Minutes 7 August Meeting

written by Adam Solomon