Daily Insight

Following the release of the Bank of England's quarterly inflation report on Wednesday, the Pound rallied strongly against the Dollar but the UK currency reversed much of those gains yesterday as the increased uncertainty in the market continued to rise. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which traded sharply lower by the close of trading last night. The increase in volatility has prompted investment from high yielding currencies back into "safe haven" currencies including the U.S Dollar, which closed 0.5% higher against the Pound last night. However, the UK currency managed to make further gains against the Euro amid reports that the European Central Bank would provide unlimited funds below the 4.0% base rate in order avert a liquidity crisis. In terms of economic data, the Pound also received some report following a report on the UK trade balance, which showed that the deficit in goods and services unexpectedly narrowed in June. The gap in trade was £6.3 billion from May, the smallest in nearly two years as demand from Europe continued to rise and oil exports reached a record level.

The Euro came under significant pressure against both the Pound and the Dollar yesterday as the turmoil surrounding financial markets prompted the European Central Bank to release €94.8 billion, which saw treasuries rise and European money markets surge. The Central Bank pledged to "closely monitor" the conditions on the Euro money market amid concerns that the U.S subprime mortgage crisis would continue to rock equity and bond markets. In an official statement, the ECB are not ruling out the need for further liquidity if calm is not restored in the market but if the volatility escalates and yields don't regulate themselves, then the Central Bank may be forced to revise their plans for a rate rise in September. As a result, the Euro plummeted 0.7% versus the Dollar and traded back towards 1.4800 against the Pound by the close of trading last night. Euro buyers would be well placed to work a stop order under this level to protect against a sharp reversal over the coming week.

The Dollar benefited from the renewed appetite in risk aversion yesterday, rising a further 0.8% against the Pound as the Australian and New Zealand Dollar suffered as investors returned to "safe haven" currencies amid the continued uncertainty in financial markets. The carnage that unfolded yesterday has seemingly taken even the Federal Reserve by surprise because as recently as Tuesday, a statement from the FOMC downplayed the risk of a major credit or liquidity crisis and opted to retain a hawkish tone. In terms of economic data, the Dollar may continue to make gains against the majors today as the prices of goods imported into the U.S is expected to rise for the sixth straight month in July.

Data Released 10th August

GER 10:00 GDP (Q2)

U.S 13:30 Import Prices (July)

- Export Prices (July)

written by Adam Solomon