Daily Insight

Initially, the Pound found some support against the majors yesterday, remaining largely unchanged versus the Euro and rising 0.2% versus the U.S Dollar amid reports that growth in UK money supply had came in higher than anticipated. The report sparked some suggestion that the Bank of England may have more work to do in order to contain inflation in the medium-to-longer term. However, the Pound has declined against both the Euro and the Dollar this morning on concerns that the credit crisis is spreading to the UK. The recent uncertainty surrounding financial markets has seen economic news remain largely insignificant but once some stability is achieved and the volatility subsides, the economic data will determine whether UK interest rates will rise again this year. Elsewhere, the Pound seemed largely unaffected following a report from Rightmove plc, which showed that house prices in London fell for the first time in a year this month. The average price for a home in the capital dipped 0.1% from July, the first drop since August last year, and suggests that higher interest rates are beginning to cool the UK housing boom.

By the close of trading last night, the Dollar had failed to make any significant gains against the majors following the Federal Reserve's surprise decision to lower its discount lending rate, putting the brakes on the unwinding of carry trades. As the appetite for risk aversion seemingly subsided so did the positive sentiment surrounding the Dollar but with the uncertainty in financial markets still causing concerns, the U.S currency may continue to make gains in the short-term.

The Euro remained largely unchanged against the Dollar last night but had fallen 0.2% versus the Pound amid a sparse supply of economic data as the focus this morning switches to the ZEW survey for investor confidence. The report is expected to highlight that confidence in Europe's largest economy fell to the lowest level in seven months in August after equity and bond markets tumbled. Concerns that companies will find it difficult to borrow money after the U.S subprime mortgage crisis has seen German economic growth slow in the second quarter as demand for European made goods faded. However, the European Central Bank and other central banks around the world have acted to stem to the turmoil surrounding financial markets and have injected more that $350 billion of emergency funds in order to avert a liquidity crisis. Therefore, the Euro may remain largely unaffected in the aftermath of the report as the ECB president, Jean-Claude Trichet, calls on investors to keep their composure and has pledged to help consolidate a "smooth return to a normal assessment of risks in liquid markets."

Data Released 21st August

EU 10:00 Trade Balance (June)

GER 10:00 ZEW Expectations Balance (August)

written by Adam Solomon