Daily Insight

The Pound dropped to a five-week low against the Dollar yesterday and loss ground against the Japanese Yen as concerns over the stability of financial markets continues to weigh heavily on high-yielding currencies. The turmoil in the U.S subprime mortgage market has spread to equity and bond markets and has seen investors unwind so called carry trades where low yielding currencies such as the Yen are sold to fund the purchase of riskier, high-yielding assets elsewhere. Nevertheless, the Pound remained firm against the Euro as a report from the DCLG showed that UK house prices were 12.1% higher in June than at this stage last year. The rate of growth was the highest since March 2005 and was up on May's revised figure of 10.8%, showing that the housing market remains resilient despite significantly higher borrowing costs. However, Sterling sentiment was further hampered after a separate report showed an unexpected dip in UK producer price inflation, which saw the Pound fall 0.5% against the U.S Dollar by the close of trading last night. The negative sentiment surrounding the Pound may gather momentum this morning ahead of the release of the latest round of consumer price inflation. The CPI report is expected to show that the UK inflation rate fell to the lowest level in over a year in July with prices rising just 2.3% from a year earlier.

The Euro came under further pressure against the Dollar yesterday and also made losses versus the Pound after the European Central Bank injected yet more liquidity into the overnight money market for the third consecutive trading session. Despite the apparent lack of economic data released in the Euro-region, the single currency has been at the mercy of the events that have evolved over the past week with markets still wary of risk exposure. The ECB loaned a further €47.7 billion Euros to banks and institutions for the third straight day but declared that the stability in the European money markets are beginning to return to normal. In addition, comments from the IMF helped to stem any further losses for the Euro as a statement released said that "the re--assessment of credit risk that is taking place will be manageable. " That sentiment is likely to shift the focus back towards the prospect of further monetary tightening in September where the ECB's governing council are expected to lift interest rates by a further 25 basis points in order to curb looming inflationary pressures.

The renewed appetite for the Dollar continued to gather momentum yesterday as the U.S currency rose 0.6% against the Euro and reached a five-week high versus the Pound as U.S retail sales increased by more than forecast in July. The report provides a strong indication that consumer spending will rebound over the coming months as the recession in the housing market persists. Sales increased 0.3% following a revised 0.7% decline in June as the figures echo recent comments from the Fed, that the economy will grow at a "moderate" pace even with the increased risks in volatile financial markets, reduced credit and the slump in housing. However, the Dollar may come under some pressure this afternoon amid the release of the U.S trade balance, which is expected to show that the deficit in goods and services widened in June. The gap is projected to rise 1.7% to $61 billion as soaring oil prices pushed up imports and wholesale prices last month.

Data Released 14th August

UK 09:30 Consumer Price Inflation (July)

EU 10:00 Industrial Production (June)

EU 10:00 Flash GDP (Q2)

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

U.S 13:30 Trade Balance (June)

written by Adam Solomon