Daily Insight

The Pound declined against both the Euro and the Dollar yesterday following a report from the Office of National Statistics, which showed that UK producer prices rose by much less than anticipated in August.

Input prices fell 0.5% while output PPI increased by a modest 0.1% from the previous month and suggests that moderating inflationary concerns will convince the Bank of England to leave interest rates on hold for the remainder of the year.

The UK economy is headed for its best performance since 2004 and the BoE released a statement last week that key inflation indicators "remain somewhat elevated". However, the report yesterday will provide some relief to policy makers as the MPC attempt to gauge the risk to economic growth from the overwhelming surge in credit costs.

Elsewhere, the Pound failed to find any support as a report from the DCLG showed that UK house prices rose by 2% in July to an average of £218,479. The annual rate of house price inflation increased from 12.1% to 12.4%, the highest since March 2005, despite five interest rate increases in the past year.

The Pound may also struggle to make any also struggle to make gains today amid the release of the UK trade balance, which is expected to show that the deficit in goods and services widened in July.

The Euro came within a whisker of a fresh record high against the Dollar yesterday and also made modest gains versus the Pound as strong French economic data combined with the growing concerns about the U.S economy saw the Euro rally for a fourth straight day.

French industrial production increased 1.3% in July, which provides an indication that a recovery in economic growth will support the ECB's still hawkish monetary policy. Following the less than convincing statement from the chairman of the Central Bank last week, the market has been pricing in the probability that Euro-zone interest rates will remain on hold for the remainder of the year.

However, the tone and language used in the statement suggests that policy makers still view upside risks to price stability and that is expected to keep the ECB from lowering interest rates.

The focus today will fall on Jean-Claude Trichet's testimony to the EU Parliament over the U.S subprime mortgage crisis, which is expected to attract plenty of attention given the current level of uncertainty surrounding the next move in Euro-zone interest rates.

The Dollar has been under considerable pressure against the Euro since last Friday as the impact from the non-farm payrolls report is paving the way for a minimum 25 basis points cut in U.S interest rates this month.

The FOMC meeting on the 18th September is attracting particular interest as the market is currently pricing in a greater than 50% chance of a half point cut. In addition, the probability that the Fed will lower rates by as much as 75 basis points is now greater than the chance that they will leave rates on hold and yet a number of Fed officials continue to try and pacify the market's fears.

The Atlanta Fed Present, Lockhart, stated that despite a weakening labour market, consumer spending will continue to support economic growth this year and therefore the focus this week will fall on the retail sales report on Friday.

The Dollar has fallen to a near record low against the Euro and is likely to continue to decline against the majors ahead of the U.S trade data this afternoon. The deficit in goods and services probably widened in July as rising oil costs offset the rise in U.S exports with the gap growing to $59 billion from $58.1 billion in June.

Data Released 11th September

UK 09:30 Trade Balance (July)

U.S 13:30 Trade Balance (July)

written by Adam Solomon