Daily Insight

The Pound came under intense pressure yesterday, dropping 0.4% versus the Euro and falling a further 1.3% against the U.S Dollar to trade well under the $2.00 level for the first time in six weeks. The Pound has been weakening against most of the lower yielding currencies as investors continue to unwind carry trades in the face of the turmoil surrounding equity and bond markets. However, the Pound fell considerably against the Dollar yesterday following reports that UK inflation unexpectedly dropped by the most in five years in July and settled below the Bank of England's 2.0% target for the first time since March 2006. Consumer prices rose just 1.9% year-on-year last month despite initial forecasts of a more modest drop towards 2.3% as higher interest rates begin to slow the economy. The unprecedented drop in inflationary pressures has ended a 14-month period when inflation exceeded the 2.0% goal and reached the highest level in a decade in March at 3.1%. Only last week the Bank of England retained a tightening bias and highlighted that upside risks to price stability remained a concern to policy makers. The report yesterday has severely questioned whether the monetary policy committee will need to raise interest rates again amid the release of the minutes from the last meeting this morning.

The Euro made strong gains against the Pound yesterday but fell a further 0.2% versus the resurgent U.S Dollar to trade at lowest level in a month following reports that European economic growth had slowed by more than initial expectations. The economy, made up of the 13 nations that share the Euro, expanded at just 0.3% in the second quarter as the apparent rebound in consumer spending failed to supplement the weakness in manufacturing and construction. The pace of growth in the slowest since the fourth quarter of 2004 and provides an indication that the expansion in the economy has reached a plateau following the Euro's dramatic appreciation against the Dollar this year. The single currency has gained 7% versus it's U.S counterpart and that has weighed heavily on European export growth while higher oil prices increased costs for companies and consumers.

The recent positive momentum surrounding the Dollar continued yesterday as the U.S currency made robust gains against the majors, particularly the Pound as we closed under the $2.00 level for the first time since May. The Dollar managed to shrug off reports that U.S producer-price inflation had risen by less than expectations in July while a surge in exports had unexpectedly narrowed the U.S trade deficit. Producer prices rose just 0.1% from a year earlier, which represents the smallest gains in three months as the report reinforces the sense that U.S inflation has been moderating of late. Elsewhere, the shortfall in trade exceeded expectations and may continue to narrow over the coming months as oil prices retreat and a weaker Dollar helps spur demand for U.S based exports. In terms of economic data, the U.S currency may come under some pressure as a broader measure of inflation may show that consumer prices rose as the slowest pace in eight months in July.

Data Released 15th August

UK 09:30 BoE MPC Minutes of the 1st -2nd August Meeting

UK 09:30 Claimant Count Unemployment (July)

UK 09:30 Average Hourly Earnings (3 months to June)

U.S 13:30 Empire State Index (August)

U.S 13:30 Consumer Price Index (July)

U.S 14:00 TICs - Net Capital Inflow (June)

U.S 14:15 Industrial Production (July)

U.S 18:00 NAHB Housing Market Index (August)

written by Adam Solomon