Daily Insight

The Pound dropped to the lowest level in two months versus the U.S Dollar yesterday following the release of the minutes from the Bank of England's last policy meeting where it was revealed that the MPC voted unanimously to hold interest rates at 5.75% this month. The monetary policy committee, including the governor of the Bank of England, Mervyn King, voted 9-0 in favour of keeping rates unchanged following a decision to raise in July. In the accompanying statement, policy makers emphasised that the committee "had no firm view on whether rates would need to rise further" and will take the time to assess the impact of five increases in the past year on curbing inflation. The tone and language used in the statement seemed to suggest that the Central Bank will adopt a neutral stance over the coming months and added that the "future path of the Bank rate would depend on the evidence in the months ahead." Therefore, following the unexpected drop in inflation last month, which fell below the government's 2.0% target, the chances of a further interest rate rise have been severely compromised.

Despite the surprisingly dovish tone from the Bank of England yesterday, the Euro traded marginally lower against the UK currency by the close of trading last night while also falling a further 0.5% versus the U.S Dollar. Nevertheless, the Euro received a much needed boost this morning following reports in Germany that the rate of inflation in Europe's largest economy had held above the ECB's 2.0% threshold for a fifth straight month in July. Consumer prices increased 0.5% from the previous month while the harmonized rate of inflation remained largely unchanged at 2.0%, which is expected to prompt the European Central Bank into raising interest rates in September. The recent turmoil surrounding financial markets has seen the ECB release an unprecedented amount of liquidity into European money markets and that generated some speculation that the Central Bank would keep rates unchanged next month.

The Dollar continued to make robust gains against the majors yesterday, firming an additional 0.9% versus the Pound despite a mixed bag of economic data, which seemed to suggest that the Federal Reserve may need to begin cutting interest rates. However, the Dollar found support after William Poole, the President of the St Louis Federal Reserve Bank, said that the U.S subprime mortgage crisis won't threaten the pace of economic growth while only a "calamity" would justify a cut in borrowing costs. U.S consumer prices rose just 0.1% in July, which represents the smallest monthly gain since January and provides an indication that inflationary pressures are moderating faster than Fed policy makers anticipated. The worst slump in housing since 1990 combined with record fuel prices have weighed heavily on consumer spending in the second quarter and that has forced retailers to lower prices in order to attract business. Elsewhere, a separate report on U.S industrial production showed that output had risen 0.3% last month as a weaker Dollar increased foreign demand for U.S based products.

Data Released 16th August

UK 09:30 Retail Sales (July)

EU 10:00 Harmonized Consumer Price Index (July)

U.S 13:30 Initial Jobless Claims (w/e 11th August)

U.S 13:30 Housing Starts (July)

U.S 17:00 Philly Fed Index (August)

written by Adam Solomon