Daily Insight

The Pound rose for a second consecutive session against the Dollar yesterday, rising back above 1.9900 after posting the biggest weekly loss in over 2-years versus the U.S currency. The renewed appetite for the Pound coincided with a sense of stability returning to financial markets and increased speculation that the Bank of England will raise UK interest rates again while the U.S Federal Reserve will look forward to a cut. As global stocks rebounded following last week's sharp declines, investors were lured back to the high-yielding currencies, which also saw the Australian and New Zealand Dollars make widespread gains. In addition, a report from the Confederation of British Industry showed that factory orders had reached the highest level in 12-years this month and suggests that manufacturing and industrial production will help support UK economic growth. As a result, there has been widespread speculation that the BoE will raise the benchmark lending rate, which is already the highest of all the major economies, a further 25 basis points to a fresh five-year high of 6.0%.

The recovery in the U.S Stock market, carry trades and bond yields rekindled some optimism back into financial markets yesterday following the Federal Reserve's surprise decision to lower the discount-lending rate. As a result, the Dollar came under renewed pressure against most of the major currencies as an air of confidence returned to the market and traders felt secure moving away from the relative "safe haven" currencies. In addition, a spate of negative U.S economic reports, which have been largely discounted of late, also weighed on Dollar sentiment with a gauge of consumer confidence and mortgage applications falling sharply.

The Euro also made strong gains versus the Dollar yesterday while remaining largely unchanged against Sterling following a surprisingly positive report on Euro-zone industrial orders. Despite the Euro's dramatic appreciation against the Dollar this year, orders increased 4.4% in June, the largest increase in nearly two years while a separate report showed that the current account balance had also jumped back into positive territory. The positive sentiment surrounding the Euro was also improved after European government bonds declined for a second consecutive day after the ECB signalled that the turmoil in credit markets won't deter the governing council from raising interest rates in September.

Data Released 23rd August

U.S 13:30 Initial Jobless Claims (w/e 25th August)

Written by Adam Solomon