The Pound declines against the Euro following a weaker-than-expected report on the UK trade balance
The Dollar continued to decline against the majors yesterday, falling to within a breath of the all-time low versus the Euro as growing concerns over the U.S economy continue to dominate.
The U.S currency has made losses for five consecutive trading sessions and that trend is likely to continue over the coming week as we build up to the FOMC interest rate announcement on the 18th September.
The stock market rallied 185 points by the close of trading last night, which provides an indication that equity traders fully expect the Federal Reserve to cut interest rates by 25 basis points in September and even that may be viewed as a disappointment. The consequences of not lowering borrowing costs would see an entire repricing of the yield curve and the likelihood of a collapse in the stock market.
Therefore, the Federal Reserve are likely to begin monetary easing this month and a quarter point cut in rates will still be negative for the Dollar as investors will begin to look outside the U.S for a higher yield. In terms of economic data, the Dollar remained largely unaffected following a report from the Commerce Department as the U.S trade deficit unexpectedly narrowed in July.
The positive sentiment surrounding the Euro continued to gather momentum yesterday as the single currency rose to a near record high versus the Dollar and also made modest gains against the Pound despite the fundamental lack of economic data released.
The recent strength of the Euro can be derived from a statement from the chairman of Central Bank, Jean-Claude Trichet, who gave a testimony to the EU Parliament on Monday and reassured markets that their expectations for growth had not changed. In addition, the ECB have retained a tightening bias with regards monetary policy as Trichet stated that inflationary pressures remain to the upside and that could prompt a further quarter-point rate hike before the turn of the year.
The Euro may continue to make gains this morning amid the release of Euro-zone industrial production, which is expected to show that manufacturing activity in the region remained strong in July.
The Pound managed to continue making gains against the Dollar yesterday but fell a further 0.1% versus the Euro amid a spate of negative economic reports, which saw the UK trade deficit widen as the non-EU gap reached a record level in July.
Nevertheless, the market's attention is focused solely on interest rate expectations at present and the Bank of England have yet to confirm whether UK borrowing costs will remain on hold for the remainder of the year.
The outlook for UK economic growth still remains positive with the economy poised to record its best performance since 2004 amid low unemployment and robust growth in the housing market.
Therefore, the focus this morning with fall on average hourly earnings through the 3 months to July and the unemployment report, which is expected to show that the jobless rate fell to a 2-year low in August.
Data Released 12th September
UK 09:30 Average Hourly Earnings (3 months to July)
UK 09:30 Claimant Count Unemployment (August)
EU 10:00 Industrial Production (July)
written by Adam Solomon
Posted at: 10:10
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