Daily Insight

The Pound came under severe pressure against the majors yesterday as the UK currency continued to consolidate from the recent highs, particularly versus the Dollar, as the appetite for risk aversion builds and investors continue to unwind carry trades. By the close of trading last night, Sterling had fallen towards the major trend support at 1.4680 against the Euro and had also dropped a further 0.7% versus the Dollar despite another wave of positive economic reports. UK industrial production rose to the highest level since August 2001 last month as growth in the economy was fuelled by demand from Europe. The index of manufacturing output climbed to a reading of 103.3 in June while production increased for a fourth consecutive month, which combined with growth in the service sector, has propelled the UK economy to the fastest pace of expansion since 2004. In addition, the report yesterday will only fuel expectations that the Bank of England have the capacity to continue raising UK interest rates, which currently stand at a six-year high of 5.75%. Nevertheless, the Pound has continued to decline against both the Euro and the Dollar and may struggle to make gains today amid the release of a report from the British Retail Consortium.

The resurgent Euro made robust gains against the Pound yesterday and also remained close to a record high versus the Dollar as the market prepares for another European interest rate hike next month. The European Central Bank have all but declared that rates will rise to 4.25% in September despite increased speculation that economic growth is slowing while inflation continues to show signs of moderating. The emphasis on money supply into the Euro-region has already been criticised by a number of ECB members but last week the chairman, Jean-Claude Trichet, maintained that the current benchmark lending rate is still at an "accommodative" level. The strength of the Euro was also bolstered yesterday by a report on German manufacturing orders, which unexpectedly rose by the most in over two years in June. Orders jumped 4.6% from the previous month, which represents the biggest monthly gain since December 2004 as the European economy accelerated to fastest pace since 2000 this year and record low unemployment encouraged companies to step up hiring. The report yesterday will perhaps provide an insight in the industrial production figures this morning, which may show that output jumped to 5.1% year-on-year in June.

The Dollar managed to claw back some gains against the Pound yesterday despite reports that the price of crude oil had slipped 3.0% by the close of trading last night on concerns that the U.S economy will slow and reduce demand at a time of rising fuel prices. Oil prices have dropped a whopping 7.5% from a record level on the 1st of August amid a drop in U.S stocks and concerns that the subprime mortgage crisis will begin to hamper U.S economic growth. Subprime mortgage defaults are currently at the highest level in 10-years while the monthly U.S job report last week showed that payrolls increased by just 92,000 last month as the employment count grew at the slowest pace since February. The focus this evening will undoubtedly fall on the FOMC rate interest rate announcement where the Federal Reserve are expected to hold U.S interest rates for the ninth consecutive month. However, the accompanying press conference will be of particular interest to investors in order to see if the turmoil in equity markets will effect the economy and monetary policy.

Data Released 6th August

GER 11:00 Industrial Production (June)

U.S 13:30 NonFarm Productivity (Prelim Q2)

- Unit Labour Costs

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon