Daily Insight

The Pound declined for a second consecutive day against both the Euro and the Dollar yesterday following a report from the British Retail Consortium, which showed that retail sales rose at the slowest pace in eight months in July. The unseasonably wet weather conditions can be identified as a factor in the lacklustre highstreet spending last month as sales rose just 1.2% compared with 4.6% the previous month. The sustained growth in consumer spending will have been one of the primary factors to influence the Bank of England's monetary policy and the MPC will be analysing retail conditions in order to gauge whether a further rise in rates is justified. The BoE have recently kept UK interest rates on hold at 5.75% although speculation continues to rise that a further hike towards 6.00% is likely this year unless inflation moderates significantly. In addition to the report, the BRC also reported that given the current conditions, the Bank should now wait and see that happens over the coming months before an eventual decision on whether to raise rates for the sixth time in little over a year. Therefore, the focus this morning will fall heavily on the Bank of England's quarterly inflation report, which is expected to provide an insight into the Central Bank's views on inflation and UK economic growth.

The Euro managed to continue making gains against the Pound yesterday and also remained largely unchanged versus the U.S Dollar despite an unexpected fall in German industrial production. Factory output in Europe's largest economy declined 0.4% in June following a drop in consumer goods and construction as higher oil prices combined with a strong Euro threatens the pace of economic expansion. The Germany economy has grown at the fastest pace since 2000 over the past year as booming exports help fuel consumer spending and overall growth in the service sector. The report yesterday follows an earlier report on German manufacturing orders, which also unexpectedly dropped over the same period although unemployment held close to a 14-year low this month.

The Dollar had made further gains against the Pound yesterday in the build up to the FOMC rate announcement where Federal Reserve policy makers were expected to hold U.S interest rates for the ninth consecutive month. The outcome of the policy-setting meeting was widely anticipated as the chairman, Ben Bernanke, announced that rates would remain unchanged at 5.25%. However, markets were paying close attention to the accompanying statement, particularly to see if there is any reference to the potential impact of the turmoil in equity and credit markets on the economy and monetary policy. Nevertheless, Fed officials seem undeterred in the battle to reduce prices and chose to focus on the "predominant risk" towards higher inflation and ignored calls for a more balanced assessment and adopt a neutral stance. Bernanke's unwillingness to budge comes after consumer price inflation slowed for the fourth straight month in June and remains at the lowest level since he took office last year.

Data Released 8th August

UK 10:30 BoE Quarterly Inflation Report

U.S 15:00 Wholesale Inventories (June)

written by Adam Solomon