Daily Insight

The Pound has continued the upward momentum against both the Euro and the Dollar after significant gains in European stocks encouraged investors to resume carry trades in which traders borrow cheaply in Japan to buy higher-yielding currencies elsewhere. Although appetite for risk is returning to financial markets, investors remain concerned
over events dominating global stock and credit markets and that is likely to set the overall tone again this week. In terms of economic news, the Bank of England are due to convene this week and are expected to keep UK interest rates on hold this Thursday but with the pace of activity remaining robust, the MPC could raise to 6.00% later in the year. As a sense of stability returns to financial markets, the positive momentum surrounding the Pound may continue as European stocks rose for a fourth straight day while the current UK monetary policy is attracting investors back in to sterling, which has risen 6% against the Dollar in the past 12 months.

The Euro struggled to stem the losses against both the Pound and the Dollar last week as the turmoil surrounding European money markets has shifted sentiment away from a possible interest rate increase this week. Earlier in August, the chairman of the ECB, Jean-Claude Trichet, gave a strong indication that rates would need to rise to 4.25% in September to ensure that risks to price stability do not materialize. However, over the past week a number of members of the ECB's governing council have elected to adopt a "dovish" tone with regards monetary policy. Trichet back-peddled in a statement last week to suggest that the Central Bank were not "pre-committed" to raising interest rates this month. Therefore, the focus this week will fall heavily on the ECB interest rate announcement on Thursday with the futures market pricing in a 40% chance of a rate increase this month and that may prompt a further Euro sell off over the course of the week. In terms of economic data, the single currency came under further pressure on Friday as the EC sentiment index showed that European consumer and business confidence dropped further than initial forecasts and to the lowest level in six months.

The Dollar continued to decline against the Pound last week as the recent turmoil surrounding equity and credit markets subsides and a sense of stability returns to financial markets. Initially, the U.S currency made robust gains against most of the high-yielding currencies as investors sought a "safe haven" amid increased volatility, which stock global stock markets plunge and the Fed take steps to lower the overnight lending rate. In terms of economic data, the Dollar failed to find any support despite a surprisingly positive report on U.S consumer spending, which rose by more than initial forecasts in July. The report also highlighted that inflation appears to have moderated and provides an indication that the economy was expanding at the start of the third quarter before credit market deteriorated following U.S subprime mortgage crisis.

Data Released 3rd September

U.S Market Holiday - Labour Day

EU 09:00 Manufacturing PMI (August)

UK 09:30 CIPS Manufacturing PMI (August)

written by Adam Solomon