Daily Insight

The Pound is poised to record its biggest monthly decline since May against the Dollar as the losses in the credit market spread throughout the world and prompted investors to unwind carry trades by selling high-yielding assets. The increased appetite for risk aversion is likely to weigh heavily on the Pound over the coming weeks although the UK currency did close marginally higher against the Dollar last night. Concerns persist that UK banks are reluctant to lend funds to eachother because of the losses related to the U.S subprime mortgage crisis amid reports that the Bank of England released £1.6 billion in liquidity under its "standing facility". That allows commercial banks to borrow funds at 1 percentage point above the benchmark interest rate at 5.75% as Barclays plc claimed that it was forced to use the emergency reserve because of technical problems clearing transactions. In terms of economic data, the Pound found some support following a report that UK banks had approved a higher percentage of mortgages in July than previously forecast. Lenders granted 115,000 loans for house purchases last month and the report suggests that five interest rate increases in a year have yet to deter consumers from adding to the national debt and thusly cool the property market.

Following the increased uncertainty and turmoil surrounding financial markets of late, the focus of attention will fall heavily on the actions and comments from the European Central Bank ahead of the September rate announcement next Thursday. Earlier this month, Jean-Claude Trichet, the President of the Central Bank, issued a statement that said "strong vigilance" would be required to make sure that risks to price stability do not materialize. In each of the prior months to a rate increase, Trichet has used the exact same terminology to signal the ECB's intentions to the market. However, with the losses suffered in European money markets this month, the tone and language used in recent statements appear to be shifting sentiment away from a rate hike in September. Despite signs that credit markets are stabilizing, demand for 3 month loans hit a record high yesterday, which shows that banks are still seeking liquidity and the futures market is therefore pricing in only a 40% chance of an interest rate hike next week. In terms of economic data, the Euro may struggle to make gains against the majors this morning as Eurozone unemployment is expected to remain unchanged in July. While elsewhere, the EC sentiment index may show that consumer and business confidence dipped in August.

The Dollar fell against both the Euro and the Pound yesterday amid speculation that the Federal Reserve Chairman, Ben Bernanke, will signal his reluctance to rescue slumping credit markets ahead of his speech at Jackson Hole this afternoon. The recent turmoil surrounding the U.S subrpime mortgage crisis has seen house prices falling with foreclosures rising and Bernanke's non-committal stance is likely to prompt further Dollar selling. Recent reports have also indicated a softening of the labour market as the weekly jobless claims increased by the highest amount since April. However, a separate report showed that the U.S economy expanded at the fastest pace in over a year in the second quarter led by a surge in exports and business investment. Economic growth was revised up to an annual rate of 4.0% but the outlook for expansion in the second half of the year has soured in recent weeks amid concerns over subprime mortgages and the restricted access to credit.

Data Released 31st August

UK 10:30 Consumer Confidence (August)

EU 10:00 EC Sentiment Index (August)

- Consumer Sentiment

- Business Sentiment

EU 10:00 EC Business Climate Index (August)

EU 10:00 Unemployment (July)

EU 10:00 Flash HICP (August)

U.S 13:30 Personal Income (July)

- Consumption

- Core PCE

U.S 14:45 Chicago PMI (August)

U.S 15:00 Factory Orders (July)

U.S 15:00 Michigan Sentiment (August Final)

written by Adam Solomon

The Pound rallied strongly against the majors yesterday, rising 0.7% versus the U.S Dollar and also rose considerably against the Euro as investors appetite for riskier assets increased as a sense of stability returned to global stock markets. Nevertheless, the UK currency may relinquish some of the gains made against the Dollar this morning amid a host of economic reports. UK house price inflation slowed to a degree in August that suggests demand for property may be cooling following the Bank of England's decision to raise interest rates on five separate occasions over the past year. The report from the Nationwide building society showed that the average cost of a home in the UK rose 9.6% for a year earlier after a 9.9% surge in July with higher borrowing costs making it much more expensive for consumers to repay a record £1.3 trillion debt. The recent turmoil surrounding financial markets stemmed from the losses on U.S subprime mortgages, which may restrain demand for homes over the coming months. The accompanying statement from Nationwide said that the overall extent of the damage to economic growth will depend of the length of the "credit crunch" and the monetary policy response from the Bank of England.

The negative sentiment surrounding the Euro continued yesterday as the single currency paired further losses against the Pound following particularly dovish comments from the chairman of the European Central Bank, Jean-Claude Trichet. The statement threw doubt on whether the ECB will raise interest rates in September as Trichet said that the governing council were not "pre-committed" into tightening monetary policy next month. The Central Bank kept up their recent cryptic stance yesterday as a member of the governing council, Bini-Smaghi, said that the markets had correctly interpreted Trichet's comments. It seems increasingly likely that the ECB are taking a noncommittal stance to properly assess the recent turmoil in credit markets before taking any action on the 6th September meeting. In terms of economic data, the Euro may find some much needed support this morning as the Purchasing Manager's index may show that European retail sales rose for the first time in four months in August.

Despite a fundamental lack of U.S economic data released yesterday, the Dollar came under further pressure versus the Pound, closing well above the $2.00 barrier last night as carry trades rebounded and the Dow Jones recouped almost all of Tuesday's losses. The return of stability in financial markets is likely to weigh heavily on the Dollar as investors turn back to high-yielding currencies while the U.S currency may be losing it's "safe haven" status as the impact from the subprime mortgage crisis may spread to real activity and raise expectations of a U.S rate cut. Nevertheless, the Dollar may find a reprieve this afternoon as U.S economic growth is expected to rebound sharply in the revised estimate for the second quarter. A surge in exports and business investment may propel the economy to an annual pace of 4.1%, the strongest level in over a year, although the outlook for growth in the remainder of 2007 has been clouded as the housing recession restricts access to credit.

Data Released 30th August

UK 09:30 Mortgage Approvals BoE (July)

UK 09:30 Consumer Credit (July)

UK 11:00 CBI Distributive Trades Survey (August)

GER 08:55 Unemployment (August)

U.S 13:30 GDP (Q2 Revised)

U.S 13:30 Initial Jobless Claims (w/e 1st September)

written by Adam Solomon

The Dollar fell modestly against the Pound yesterday but stood firm versus the Euro despite a report on U.S consumer sentiment, which showed that confidence had dropped by the most in two years this month. The Conference Board's index fell to a reading of 105.0 from 111.9 the previous month and although the report matched initial forecasts, the Dollar dropped amid speculation that spending growth may stall after a housing-induced credit market slump. Although the report fell largely in line with expectations, the New-York based confidence index is the first indicator to reflect the increase in the cost of borrowing this month and underlines the Fed's concerns that risks to economic growth have "risen appreciably". Despite the latest spate of economic reports, the Dollar's decline was short-lived as the uncertainty surrounding financial markets continues with the Dow Jones falling 280 points over the course of the day. In addition, the minutes from the Federal Reserve's last policy meeting exacerbated the liquidation of U.S stocks. The tone and language used in the report did not contain any surprises as the last meeting was held before the emergency conference call on the 17th August where the Fed cut the discount lending rate in order to bring stability to the market.

The Pound traded marginally higher against the Dollar yesterday and also rose steadily versus the Euro despite a particularly negative report from the British Bankers Association, which showed that UK lenders approved fewer mortgages in July. The report yesterday provides the latest indication that five interest rate increases in a year is starting to cool the UK housing market after a separate report showed that house prices were unchanged in August, the worst performance since November 2005. The Bank of England elected to keep rates unchanged at 5.75% this month, the highest level in six years, and stated that the property market is showing signs of "softening" amid moderating inflationary pressures and deteriorating consumer sentiment.

Amid the renewed uncertainty surrounding financial markets, the Euro was pushed lower against the Dollar by the close of trading last night as the appetite for risk aversion increased and traders returned to the relative "safe haven" currencies. In addition, the single currency fell for a second consecutive day as German business confidence declined to the lowest level in 10-months after the turmoil in the credit market clouded the outlook for European economic expansion. The Ifo sentiment index declined to a reading of 105.8 from 106.4 in July, which was slightly better than expected amid reports that German investor confidence had fallen to an eight month low over the same period. Concerns over the U.S subprime mortgage crisis has pushed up the cost of credit and made borrowing more difficult for companies while a separate report this morning has showed that German consumer confidence declined for the time in six months.

Data Released 29th August

GER 07:00 Gfk Consumer Confidence (September)

written by Adam Solomon

Following on from last week, the Dollar fell marginally lower against the Pound by the close of trading on Friday but rose 0.1% versus the Euro following a particularly positive report on U.S durable goods orders. American companies increased corporate spending in July as orders climbed 5.9%, which was significantly more than initial forecasts and the biggest month-on-month increase since September. Elsewhere, a separate report showed that there are signs of stability returning to the U.S housing market before this month's subprime mortgage crisis. The sales of new homes unexpectedly rose 2.8% in July to an annual pace of 870,000 amid speculation that home sales are likely to show renewed weakness as the turmoil in credit markets pushes many mortgage lenders into administration. As the turmoil surrounding financial markets began to subside and some stability returned to trading, the Dollar came under renewed pressure versus the Pound and closed back above the $2.00 level last week. In terms of economic data, the U.S currency may continue to struggle this afternoon amid the release of consumer confidence data, which is expected to show that sentiment fell from a reading of 112.0 in July to 105.0 in August.

The Euro remained largely unchanged against the Pound last week but was down marginally versus the Dollar as growth in European manufacturing and service industries unexpectedly slowed in August. The preliminary estimate of the EC sentiment index seemed to suggest that the pace of orders had slowed this month while the turmoil in global credit markets may be starting to weigh on the European economy. Manufacturing orders increased at the slowed pace since November 2005 as the Euro's dramatic appreciation against the Dollar cooled demand from overseas while economic growth in the Euro-region had slowed more than forecast in the second quarter. Nevertheless, the uncertainty surrounding bond and equity markets combined with slowing economic growth is unlikely to affect monetary policy as the ECB stood resilient in their plans to raise interest rates in September. However, the Euro came under increased pressure against the majors yesterday after the chairman of the Central Bank, Jean-Claude Trichet, appeared to revise his earlier stance and stated that the governing council was not "pre-committed" to raising interest rates next month.

The Pound bounced back strongly against the Dollar last week as appetite for risk aversion abated and investors looked to higher-yielding currencies amid a sense of stability returning to financial markets. In addition, the Pound found further support and rose briefly above 2.0100 versus the Dollar amid reports that the UK economy had accelerated in the second quarter. Gross domestic product increased 0.8% from the previous quarter, driven by increased consumer spending and business investment as the economy heads for the best period of growth in three years. The Pound rallied amid speculation that strong manufacturing data and faster economic growth will convince the Bank of England to raise UK interest rates to 6.0% by the end of the year.

Data Released 28th August

EU 09:00 M3 / Money Supply

GER 09:00 Ifo Business Climate Index (August)

U.S 15:00 Consumer Confidence (August)

U.S 19:00 FOMC Minutes 7 August Meeting

written by Adam Solomon

The Pound rose back above the $2.00 level yesterday for the first time in over a week versus the U.S Dollar as a sense of stability returned to financial markets and investors raised bets that the Bank of England will lift UK interest rates over the coming months. The Pound climbed 0.6% against the Dollar last night and also made gains versus the Euro amid reports that the risk of owning corporate bonds in Europe fell to the lowest level in over a month. The speculation surrounding UK monetary policy has been supportive for Sterling as the market anticipates a further rise to 6.0% by the turn of year after a spate of positive economic reports showed a pick-up in UK manufacturing and increased business investment. The renewed sentiment for the Pound may continue this morning following the release of the revised estimate of UK gross domestic product, which is expected to show that economic growth remained largely unchanged in the second quarter.

Despite the recent uncertainty surrounding global financial markets, the European Central Bank still plans on raising interest rates next month despite injecting almost €40 billion into European money markets to avert a liquidity crisis. A press release yesterday showed that the governing council still held the same monetary stance as previously expressed by the chairman, Jean-Claude Trichet, on the 2nd August. In the press conference that followed the August rate announcement, Trichet expressed concerns over rising prices and was adamant that policy makers needed to exercise "strong vigilance", which prepared the market for a September rate hike. The Euro has rallied strongly against the Dollar and other low yielding currencies but failed to make gains versus the Pound. The single currency may also struggle this morning amid reports that growth in European manufacturing and the service sector probably slowed in August.

The Dollar came under increased pressure against the Pound yesterday, falling for a third consecutive trading session as appetite for risk aversion subsided and some stability returned to credit and bond markets. In terms of economic data, the market largely ignored the weekly jobless claims, which showed that first-time applications for unemployment benefits fell by almost 2,000 in the week ending 18th August. Rising business investment and strong demand from overseas is prompting U.S companies to retain workers and the report yesterday provides the latest indication that the strength of the labour market will supplement the widening credit crunch. Elsewhere, the Dollar may continue to decline against both the Pound and the Euro this afternoon amid the release of the latest housing report. New home sales are expected to drop to the lowest level in seven years for July, showing a worsening housing recession that threatens to curb U.S economic growth.

Data Released 24th August

EU 09:00 Flash Manufacturing PMI (August)

- Flash Services PMI

UK 09:30 GDP (Q2 Revised)

U.S 13:30 Durable Goods Orders (July)

U.S 15:00 New Home Sales (July)

written by Adam Solomon

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

Initially, the Pound found some support against the majors yesterday, remaining largely unchanged versus the Euro and rising 0.2% versus the U.S Dollar amid reports that growth in UK money supply had came in higher than anticipated. The report sparked some suggestion that the Bank of England may have more work to do in order to contain inflation in the medium-to-longer term. However, the Pound has declined against both the Euro and the Dollar this morning on concerns that the credit crisis is spreading to the UK. The recent uncertainty surrounding financial markets has seen economic news remain largely insignificant but once some stability is achieved and the volatility subsides, the economic data will determine whether UK interest rates will rise again this year. Elsewhere, the Pound seemed largely unaffected following a report from Rightmove plc, which showed that house prices in London fell for the first time in a year this month. The average price for a home in the capital dipped 0.1% from July, the first drop since August last year, and suggests that higher interest rates are beginning to cool the UK housing boom.

By the close of trading last night, the Dollar had failed to make any significant gains against the majors following the Federal Reserve's surprise decision to lower its discount lending rate, putting the brakes on the unwinding of carry trades. As the appetite for risk aversion seemingly subsided so did the positive sentiment surrounding the Dollar but with the uncertainty in financial markets still causing concerns, the U.S currency may continue to make gains in the short-term.

The Euro remained largely unchanged against the Dollar last night but had fallen 0.2% versus the Pound amid a sparse supply of economic data as the focus this morning switches to the ZEW survey for investor confidence. The report is expected to highlight that confidence in Europe's largest economy fell to the lowest level in seven months in August after equity and bond markets tumbled. Concerns that companies will find it difficult to borrow money after the U.S subprime mortgage crisis has seen German economic growth slow in the second quarter as demand for European made goods faded. However, the European Central Bank and other central banks around the world have acted to stem to the turmoil surrounding financial markets and have injected more that $350 billion of emergency funds in order to avert a liquidity crisis. Therefore, the Euro may remain largely unaffected in the aftermath of the report as the ECB president, Jean-Claude Trichet, calls on investors to keep their composure and has pledged to help consolidate a "smooth return to a normal assessment of risks in liquid markets."

Data Released 21st August

EU 10:00 Trade Balance (June)

GER 10:00 ZEW Expectations Balance (August)

written by Adam Solomon

Following on from last week, the Pound suffered its biggest weekly fall in over two years against the Dollar, plummeting through the $2.00 barrier to trade as low as 1.9750 amid increased appetite for risk aversion that continues to weigh on the higher-yielding currencies. In addition, the downward momentum surrounding the Pound continued following the release of the minutes from the Bank of England's last policy meeting, which showed that the monetary policy committee had voted unanimously to hold UK interest rates this month. The language used in the report seemed to strike a dovish tone from the nine-strong committee as the Central Bank stated that they had "no firm view on whether rates would need to rise further". Elsewhere, the latest round of consumer price data showed that inflation had moderated to 1.9% year-on-year last month and recorded the biggest monthly fall in five years. The UK rate of inflation had settled under the Bank of England's 2.0% target for the first time since March 2006 and suggests that the Central Bank won't need to raise interest rates beyond 5.75%. The Pound looks set to remain vulnerable against the Dollar this week and may continue to decline as a report from Rightmove plc showed that London house prices fell for the first time in a year.

The Euro remained largely unchanged against the Pound and the Dollar on Friday as some stability returned to European money markets following the ECB's decision to inject an unprecedented amount of funds on Tuesday to prevent a liquidity crisis. Initially, the single currency declined heavily against the Dollar amid suggestions that the ECB will refrain from raising interest rates next month as stock markets tumble and concerns deepen that the credit crunch sparked by the U.S subprime mortgage crisis will cub economic expansion. In terms of economic data, the focus this week will on the German ZEW index of investor sentiment, which is expected to show that the headline measure fell again in August. However, the index has recently proved itself to be poorly correlated with surveys based on real activity and investors are likely to pay more attention to the Purchasing Managers' index of European manufacturing and service sector growth.

The positive momentum surrounding the Dollar gathered pace last week as the U.S currency dropped under the $2.00 level versus the Pound for the first time in six weeks amid the turmoil in financial markets, which led investors back towards relative "safe haven" currencies including the Dollar and the Yen. By the close of trading on Friday, the Dollar had relinquished some gains against Sterling and had also fell versus the Euro amid reports that the U.S Federal Reserve had cut the prime discount rate to 5.75% from 6.25% in response to deteriorating market conditions. As a result, the Euro found some support and U.S stocks rallied sharply, although selling pressures could resume if markets fail to stabilize this week. Amid the increased uncertainty in equity and bond markets, the host of U.S economic data was largely ignored as a gauge of U.S consumer sentiment showed that confidence in the economy had dropped to the lowest level in a year this month.

Data Released 20th August

U.S 15:00 Leading Indicators (July)

written by Adam Solomon

The decline of the Pound continued to gather momentum yesterday as the UK currency is poised for its biggest weekly fall in over two years against the Dollar as the liquidation of high-yielding currencies has sent the Pound plummeting alongside the Australian and New Zealand Dollars. Despite a stronger-than-expected report on UK retail sales in July, the Pound failed to find any support against the U.S currency as the appetite for risk aversion increased amid the fallout from widening credit losses tied to U.S subprime loans. In addition, the dovish tone of the minutes from the Bank of England's August meeting has prompted speculation that UK interest rates may have peaked at 5.75%. Falling rate-hike expectations combined with the unwinding of so-called carry trades is likely to hamper Sterling over the coming weeks, particularly as the selling of high-yielding currencies continues.

The Euro remained largely unchanged against the Dollar yesterday, snapping a three day losing streak while the single currency managed to make some gains versus the Pound as the turmoil surrounding financial markets won't have a bearing on the ECB's monetary outlook. Following a particularly hawkish rhetoric from the chairman of the Central Bank, Jean-Claude Trichet, earlier this month, the governing council are expected to lift interest rates by a further 25 basis points to 4.25% in September. However, the ECB have injected an unprecedented amount of liquidity into European money markets over the past week as stock markets tumble and concerns deepen that a credit crunch sparked by the U.S subprime mortgage crisis will curb company earnings and slow economic growth.

The renewed strength of the U.S Dollar continued to gather momentum yesterday amid increased volatility in the financial markets, which saw the Dow plummet 340 points before consolidating at the close of trading last night. The sharp fall in credit and equity markets combined with the fundamental lack of liquidity at present has forced many investors to liquidate positions. As a result, the uncertainty surrounding the market increases appetite for risk aversion, which has sent the U.S Dollar higher against every major currency excluding the Japanese Yen. However, the sharp increase in volatility has prompted further speculation that the reversal of earlier losses in the stock market will influence the Federal Reserve to eventually cut U.S interest rates. Although the Fed have yet to publicly announce the concerns surround market volatility, investors are currently pricing in a 75% chance of a rate cut by the end of the year. Elsewhere, the Dollar remained resilient despite news that U.S housing starts had a hit a 10-year low in July while manufacturing output in the Philadelphia region fell below initial forecasts.

Data Released 17th August

U.S 15:00 Michigan Sentiment (August Prelim)

written by Adam Solomon

The Pound dropped to the lowest level in two months versus the U.S Dollar yesterday following the release of the minutes from the Bank of England's last policy meeting where it was revealed that the MPC voted unanimously to hold interest rates at 5.75% this month. The monetary policy committee, including the governor of the Bank of England, Mervyn King, voted 9-0 in favour of keeping rates unchanged following a decision to raise in July. In the accompanying statement, policy makers emphasised that the committee "had no firm view on whether rates would need to rise further" and will take the time to assess the impact of five increases in the past year on curbing inflation. The tone and language used in the statement seemed to suggest that the Central Bank will adopt a neutral stance over the coming months and added that the "future path of the Bank rate would depend on the evidence in the months ahead." Therefore, following the unexpected drop in inflation last month, which fell below the government's 2.0% target, the chances of a further interest rate rise have been severely compromised.

Despite the surprisingly dovish tone from the Bank of England yesterday, the Euro traded marginally lower against the UK currency by the close of trading last night while also falling a further 0.5% versus the U.S Dollar. Nevertheless, the Euro received a much needed boost this morning following reports in Germany that the rate of inflation in Europe's largest economy had held above the ECB's 2.0% threshold for a fifth straight month in July. Consumer prices increased 0.5% from the previous month while the harmonized rate of inflation remained largely unchanged at 2.0%, which is expected to prompt the European Central Bank into raising interest rates in September. The recent turmoil surrounding financial markets has seen the ECB release an unprecedented amount of liquidity into European money markets and that generated some speculation that the Central Bank would keep rates unchanged next month.

The Dollar continued to make robust gains against the majors yesterday, firming an additional 0.9% versus the Pound despite a mixed bag of economic data, which seemed to suggest that the Federal Reserve may need to begin cutting interest rates. However, the Dollar found support after William Poole, the President of the St Louis Federal Reserve Bank, said that the U.S subprime mortgage crisis won't threaten the pace of economic growth while only a "calamity" would justify a cut in borrowing costs. U.S consumer prices rose just 0.1% in July, which represents the smallest monthly gain since January and provides an indication that inflationary pressures are moderating faster than Fed policy makers anticipated. The worst slump in housing since 1990 combined with record fuel prices have weighed heavily on consumer spending in the second quarter and that has forced retailers to lower prices in order to attract business. Elsewhere, a separate report on U.S industrial production showed that output had risen 0.3% last month as a weaker Dollar increased foreign demand for U.S based products.

Data Released 16th August

UK 09:30 Retail Sales (July)

EU 10:00 Harmonized Consumer Price Index (July)

U.S 13:30 Initial Jobless Claims (w/e 11th August)

U.S 13:30 Housing Starts (July)

U.S 17:00 Philly Fed Index (August)

written by Adam Solomon

The Pound came under intense pressure yesterday, dropping 0.4% versus the Euro and falling a further 1.3% against the U.S Dollar to trade well under the $2.00 level for the first time in six weeks. The Pound has been weakening against most of the lower yielding currencies as investors continue to unwind carry trades in the face of the turmoil surrounding equity and bond markets. However, the Pound fell considerably against the Dollar yesterday following reports that UK inflation unexpectedly dropped by the most in five years in July and settled below the Bank of England's 2.0% target for the first time since March 2006. Consumer prices rose just 1.9% year-on-year last month despite initial forecasts of a more modest drop towards 2.3% as higher interest rates begin to slow the economy. The unprecedented drop in inflationary pressures has ended a 14-month period when inflation exceeded the 2.0% goal and reached the highest level in a decade in March at 3.1%. Only last week the Bank of England retained a tightening bias and highlighted that upside risks to price stability remained a concern to policy makers. The report yesterday has severely questioned whether the monetary policy committee will need to raise interest rates again amid the release of the minutes from the last meeting this morning.

The Euro made strong gains against the Pound yesterday but fell a further 0.2% versus the resurgent U.S Dollar to trade at lowest level in a month following reports that European economic growth had slowed by more than initial expectations. The economy, made up of the 13 nations that share the Euro, expanded at just 0.3% in the second quarter as the apparent rebound in consumer spending failed to supplement the weakness in manufacturing and construction. The pace of growth in the slowest since the fourth quarter of 2004 and provides an indication that the expansion in the economy has reached a plateau following the Euro's dramatic appreciation against the Dollar this year. The single currency has gained 7% versus it's U.S counterpart and that has weighed heavily on European export growth while higher oil prices increased costs for companies and consumers.

The recent positive momentum surrounding the Dollar continued yesterday as the U.S currency made robust gains against the majors, particularly the Pound as we closed under the $2.00 level for the first time since May. The Dollar managed to shrug off reports that U.S producer-price inflation had risen by less than expectations in July while a surge in exports had unexpectedly narrowed the U.S trade deficit. Producer prices rose just 0.1% from a year earlier, which represents the smallest gains in three months as the report reinforces the sense that U.S inflation has been moderating of late. Elsewhere, the shortfall in trade exceeded expectations and may continue to narrow over the coming months as oil prices retreat and a weaker Dollar helps spur demand for U.S based exports. In terms of economic data, the U.S currency may come under some pressure as a broader measure of inflation may show that consumer prices rose as the slowest pace in eight months in July.

Data Released 15th August

UK 09:30 BoE MPC Minutes of the 1st -2nd August Meeting

UK 09:30 Claimant Count Unemployment (July)

UK 09:30 Average Hourly Earnings (3 months to June)

U.S 13:30 Empire State Index (August)

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

U.S 14:00 TICs - Net Capital Inflow (June)

U.S 14:15 Industrial Production (July)

U.S 18:00 NAHB Housing Market Index (August)

written by Adam Solomon

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

Following on from last week, the turmoil surrounding financial markets has continued to dominate and the Pound has resumed the downward momentum against the Dollar amid speculation that the so-called carry trades will continue to unwind. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which has traded sharply lower over the past couple of sessions. The increase in volatility has prompted investment from high yielding currencies back into "safe haven" currencies including the U.S Dollar, which has risen 2.6% against the Pound over the past ten days alone. In addition, there is a host of key economic data released in the UK this week that could potentially sway monetary policy with the minutes from the BoE's last policy meeting taking centre stage. Following the release of the Central Bank's quarterly inflation report last week, policy makers may retain a tightening bias after confirming that interest rates are likely to rise to 6.0% by the turn of the year. Elsewhere, the latest round of inflation data will prove pivotal as UK consumer prices are expected to fall to the lowest level in over a year in July as five interest rate increases in under a year begin to slow the economy.

The Euro plummeted against the Dollar last week and also made further losses versus the Pound amid news that the European Central Bank would provide unlimited funds below the 4.0% base rate to avoid a liquidity crisis. As a result, treasuries rose and European money markets surged and that trend looks set to continue in the short-term as the ECB injects a further €47 billion into the market for a third consecutive trading day. Investors are demanding compensation in the form of higher yields after further losses in bonds backed by subprime mortgages continues to spread to other markets and threatens to curtail lending. In terms of economic data, the Euro may find some support against the majors this week amid the release of the flash estimates for Euro-zone GDP in the second quarter. The report is expected to show that growth slowed modestly to 0.6% although the year-on-year rate is still above trend at 2.7% and therefore supports the case for higher interest rates.

The renewed appetite for the Dollar looks set to gather momentum this week amid a packed schedule of U.S economic data while the continued uncertainty surrounding the financial markets is attracting investors back to the U.S currency. Following comments from the Federal Reserve last week that inflation remains the overriding concern to policy makers, the latest round of CPI data is expected to remain above 2.0% and keep the Fed from cutting rates this year. Meanwhile, the Dollar may also find some support this afternoon amid the release of the latest round of retail data, which is expected to show that sales in the U.S rose in July. The report may illustrate that consumer spending is moderating slightly while the housing recession persists as sales rise 0.2% following a 0.9% collapse in June.

Data Released 13th August

UK 09:30 DCLG House Prices (June)

UK 09:30 Producer Price Index (June)

U.S 13:30 Retail Sales (July)

U.S 15:00 Business Inventories (June)

written by Adam Solomon

Following the release of the Bank of England's quarterly inflation report on Wednesday, the Pound rallied strongly against the Dollar but the UK currency reversed much of those gains yesterday as the increased uncertainty in the market continued to rise. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which traded sharply lower by the close of trading last night. The increase in volatility has prompted investment from high yielding currencies back into "safe haven" currencies including the U.S Dollar, which closed 0.5% higher against the Pound last night. However, the UK currency managed to make further gains against the Euro amid reports that the European Central Bank would provide unlimited funds below the 4.0% base rate in order avert a liquidity crisis. In terms of economic data, the Pound also received some report following a report on the UK trade balance, which showed that the deficit in goods and services unexpectedly narrowed in June. The gap in trade was £6.3 billion from May, the smallest in nearly two years as demand from Europe continued to rise and oil exports reached a record level.

The Euro came under significant pressure against both the Pound and the Dollar yesterday as the turmoil surrounding financial markets prompted the European Central Bank to release €94.8 billion, which saw treasuries rise and European money markets surge. The Central Bank pledged to "closely monitor" the conditions on the Euro money market amid concerns that the U.S subprime mortgage crisis would continue to rock equity and bond markets. In an official statement, the ECB are not ruling out the need for further liquidity if calm is not restored in the market but if the volatility escalates and yields don't regulate themselves, then the Central Bank may be forced to revise their plans for a rate rise in September. As a result, the Euro plummeted 0.7% versus the Dollar and traded back towards 1.4800 against the Pound by the close of trading last night. Euro buyers would be well placed to work a stop order under this level to protect against a sharp reversal over the coming week.

The Dollar benefited from the renewed appetite in risk aversion yesterday, rising a further 0.8% against the Pound as the Australian and New Zealand Dollar suffered as investors returned to "safe haven" currencies amid the continued uncertainty in financial markets. The carnage that unfolded yesterday has seemingly taken even the Federal Reserve by surprise because as recently as Tuesday, a statement from the FOMC downplayed the risk of a major credit or liquidity crisis and opted to retain a hawkish tone. In terms of economic data, the Dollar may continue to make gains against the majors today as the prices of goods imported into the U.S is expected to rise for the sixth straight month in July.

Data Released 10th August

GER 10:00 GDP (Q2)

U.S 13:30 Import Prices (July)

- Export Prices (July)

written by Adam Solomon

Following the release of the Bank of England's quarterly inflation report on Wednesday, the Pound rallied strongly against the Dollar but the UK currency reversed much of those gains yesterday as the increased uncertainty in the market continued to rise. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which traded sharply lower by the close of trading last night. The increase in volatility has prompted investment from high yielding currencies back into "safe haven" currencies including the U.S Dollar, which closed 0.5% higher against the Pound last night. However, the UK currency managed to make further gains against the Euro amid reports that the European Central Bank would provide unlimited funds below the 4.0% base rate in order avert a liquidity crisis. In terms of economic data, the Pound also received some report following a report on the UK trade balance, which showed that the deficit in goods and services unexpectedly narrowed in June. The gap in trade was £6.3 billion from May, the smallest in nearly two years as demand from Europe continued to rise and oil exports reached a record level.

The Euro came under significant pressure against both the Pound and the Dollar yesterday as the turmoil surrounding financial markets prompted the European Central Bank to release €94.8 billion, which saw treasuries rise and European money markets surge. The Central Bank pledged to "closely monitor" the conditions on the Euro money market amid concerns that the U.S subprime mortgage crisis would continue to rock equity and bond markets. In an official statement, the ECB are not ruling out the need for further liquidity if calm is not restored in the market but if the volatility escalates and yields don't regulate themselves, then the Central Bank may be forced to revise their plans for a rate rise in September. As a result, the Euro plummeted 0.7% versus the Dollar and traded back towards 1.4800 against the Pound by the close of trading last night. Euro buyers would be well placed to work a stop order under this level to protect against a sharp reversal over the coming week.

The Dollar benefited from the renewed appetite in risk aversion yesterday, rising a further 0.8% against the Pound as the Australian and New Zealand Dollar suffered as investors returned to "safe haven" currencies amid the continued uncertainty in financial markets. The carnage that unfolded yesterday has seemingly taken even the Federal Reserve by surprise because as recently as Tuesday, a statement from the FOMC downplayed the risk of a major credit or liquidity crisis and opted to retain a hawkish tone. In terms of economic data, the Dollar may continue to make gains against the majors today as the prices of goods imported into the U.S is expected to rise for the sixth straight month in July.

Data Released 10th August

GER 10:00 GDP (Q2)

U.S 13:30 Import Prices (July)

- Export Prices (July)

written by Adam Solomon

The Pound found some support against the majors yesterday, snapping a two-day losing streak versus the Euro and the Dollar following the release of the Bank of England's quarterly inflation report. The monetary policy committee have lifted UK interest rates on five separate occasions since last August in an attempt to bring inflation back towards the 2.0% target. Consumer price inflation has accelerated to a decade high in the second quarter and the report yesterday seemed to support the view that the BoE would lift UK rates at least once more and ease inflation back towards 2.0% by 2009. The tone and language used in the accompanying statement also indicated that while the "upside risks" to price stability have "diminished somewhat" the rate of inflation won't drop below the 2.0% target in 2008 as previously forecast in May. The Bank of England have the unenviable job of balancing risks to price stability and higher commodity prices against the global turmoil in the equity market, which has increased the cost of borrowing for companies while consumers are forced to shoulder record debts.

The Euro fell 0.5% against the Pound yesterday but continued the upward momentum versus the Dollar following a report on German export growth, which rose by the most in eight months in June. Overseas demand is currently spurring economic growth as sales abroad jumped 2.1% from May and the report will rekindle some optimism that the Euro's dramatic appreciation against the Dollar won't hamper economic expansion. Foreign sales helped propel the German economy to the fastest pace of growth in seven years as unemployment fell to a record low and companies stepped up hiring in order to meet demand from overseas. However, the Euro has gained 10% against the Dollar this year alone and concerns were growing within the ECB that the outlook for export growth remains muted as European goods became less competitive. The Euro may find some support this morning amid the release of the ECB monthly bulletin, which is expected to reiterate the hawkish tone of the press conference last week.

The Dollar declined heavily against the majors yesterday, trading back above 2.0300 versus the Pound while falling to a near-record low against the Euro amid a great deal of uncertainty as the volatility surrounding financial markets intensifies. The U.S currency came under renewed pressure following China's threat to dump U.S treasuries and U.S dollars as bond prices sold off drastically in the aftermath of the report. The news prompted Treasury Secretary, Hank Paulson to make an unscheduled appearance on CNBC to refute fears that the Chinese have the power to influence U.S markets. Even the President, George Bush, felt the need to publicly announce that the U.S economy can cope with market volatility and did not view the threat from the Chinese as serious. However, the decline of the Dollar yesterday can be attributed to a number of factors, not least is the commitment from other Central Banks to continue raising interest rates. A hawkish report from the Bank of England all but guaranteed a further quarter-point rise in UK borrowing costs this year while the ECB held a press conference last week to announce that they plan to lift European rates to 4.25% next month.

Data Released 9th August

EU 09:00 ECB Monthly Bulletin

UK 09:30 Global Trade Balance (June)

- Trade Balance ex EU

U.S 13:30 Weekly Jobless Claims (w/e 28th July)

written by Adam Solomon

The Pound declined for a second consecutive day against both the Euro and the Dollar yesterday following a report from the British Retail Consortium, which showed that retail sales rose at the slowest pace in eight months in July. The unseasonably wet weather conditions can be identified as a factor in the lacklustre highstreet spending last month as sales rose just 1.2% compared with 4.6% the previous month. The sustained growth in consumer spending will have been one of the primary factors to influence the Bank of England's monetary policy and the MPC will be analysing retail conditions in order to gauge whether a further rise in rates is justified. The BoE have recently kept UK interest rates on hold at 5.75% although speculation continues to rise that a further hike towards 6.00% is likely this year unless inflation moderates significantly. In addition to the report, the BRC also reported that given the current conditions, the Bank should now wait and see that happens over the coming months before an eventual decision on whether to raise rates for the sixth time in little over a year. Therefore, the focus this morning will fall heavily on the Bank of England's quarterly inflation report, which is expected to provide an insight into the Central Bank's views on inflation and UK economic growth.

The Euro managed to continue making gains against the Pound yesterday and also remained largely unchanged versus the U.S Dollar despite an unexpected fall in German industrial production. Factory output in Europe's largest economy declined 0.4% in June following a drop in consumer goods and construction as higher oil prices combined with a strong Euro threatens the pace of economic expansion. The Germany economy has grown at the fastest pace since 2000 over the past year as booming exports help fuel consumer spending and overall growth in the service sector. The report yesterday follows an earlier report on German manufacturing orders, which also unexpectedly dropped over the same period although unemployment held close to a 14-year low this month.

The Dollar had made further gains against the Pound yesterday in the build up to the FOMC rate announcement where Federal Reserve policy makers were expected to hold U.S interest rates for the ninth consecutive month. The outcome of the policy-setting meeting was widely anticipated as the chairman, Ben Bernanke, announced that rates would remain unchanged at 5.25%. However, markets were paying close attention to the accompanying statement, particularly to see if there is any reference to the potential impact of the turmoil in equity and credit markets on the economy and monetary policy. Nevertheless, Fed officials seem undeterred in the battle to reduce prices and chose to focus on the "predominant risk" towards higher inflation and ignored calls for a more balanced assessment and adopt a neutral stance. Bernanke's unwillingness to budge comes after consumer price inflation slowed for the fourth straight month in June and remains at the lowest level since he took office last year.

Data Released 8th August

UK 10:30 BoE Quarterly Inflation Report

U.S 15:00 Wholesale Inventories (June)

written by Adam Solomon

The Pound came under severe pressure against the majors yesterday as the UK currency continued to consolidate from the recent highs, particularly versus the Dollar, as the appetite for risk aversion builds and investors continue to unwind carry trades. By the close of trading last night, Sterling had fallen towards the major trend support at 1.4680 against the Euro and had also dropped a further 0.7% versus the Dollar despite another wave of positive economic reports. UK industrial production rose to the highest level since August 2001 last month as growth in the economy was fuelled by demand from Europe. The index of manufacturing output climbed to a reading of 103.3 in June while production increased for a fourth consecutive month, which combined with growth in the service sector, has propelled the UK economy to the fastest pace of expansion since 2004. In addition, the report yesterday will only fuel expectations that the Bank of England have the capacity to continue raising UK interest rates, which currently stand at a six-year high of 5.75%. Nevertheless, the Pound has continued to decline against both the Euro and the Dollar and may struggle to make gains today amid the release of a report from the British Retail Consortium.

The resurgent Euro made robust gains against the Pound yesterday and also remained close to a record high versus the Dollar as the market prepares for another European interest rate hike next month. The European Central Bank have all but declared that rates will rise to 4.25% in September despite increased speculation that economic growth is slowing while inflation continues to show signs of moderating. The emphasis on money supply into the Euro-region has already been criticised by a number of ECB members but last week the chairman, Jean-Claude Trichet, maintained that the current benchmark lending rate is still at an "accommodative" level. The strength of the Euro was also bolstered yesterday by a report on German manufacturing orders, which unexpectedly rose by the most in over two years in June. Orders jumped 4.6% from the previous month, which represents the biggest monthly gain since December 2004 as the European economy accelerated to fastest pace since 2000 this year and record low unemployment encouraged companies to step up hiring. The report yesterday will perhaps provide an insight in the industrial production figures this morning, which may show that output jumped to 5.1% year-on-year in June.

The Dollar managed to claw back some gains against the Pound yesterday despite reports that the price of crude oil had slipped 3.0% by the close of trading last night on concerns that the U.S economy will slow and reduce demand at a time of rising fuel prices. Oil prices have dropped a whopping 7.5% from a record level on the 1st of August amid a drop in U.S stocks and concerns that the subprime mortgage crisis will begin to hamper U.S economic growth. Subprime mortgage defaults are currently at the highest level in 10-years while the monthly U.S job report last week showed that payrolls increased by just 92,000 last month as the employment count grew at the slowest pace since February. The focus this evening will undoubtedly fall on the FOMC rate interest rate announcement where the Federal Reserve are expected to hold U.S interest rates for the ninth consecutive month. However, the accompanying press conference will be of particular interest to investors in order to see if the turmoil in equity markets will effect the economy and monetary policy.

Data Released 6th August

GER 11:00 Industrial Production (June)

U.S 13:30 NonFarm Productivity (Prelim Q2)

- Unit Labour Costs

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon

Following on from last week, the Dollar declined heavily against the majors on Friday amid a host of negative economic reports that showed an expected slowdown in the services sector and labour market. The monthly U.S job report came in much weaker than initial forecasts as the economy added just 92,000 jobs to payrolls in July, the weakest level since February and the third lowest in two years. Despite a sharp rise in U.S consumer confidence and a drop in the average weekly jobless claims, companies are seemingly reluctant to continue hiring as the drop in payrolls brought the unemployment rate up to 4.6% and the highest level since September last year. As a result, the Dollar fell considerably against the Pound, resuming the downward trend that saw the U.S currency slump to the lowest level in over a quarter of a century last month. There may be little respite for the Dollar this week as the focus switches to the FOMC interest rate announcement on Tuesday where the Fed are widely expected to hold rates at 5.25% for the ninth consecutive month.

The Euro remained largely unchanged versus the Pound last week but made robust gains against the Dollar following the ECB interest rate announcement and press conference on Thursday. The President of the Central Bank, Jean-Claude Trichet, acknowledged that the European economy had accelerated at the fastest pace in seven years and promptly signalled that the governing council would be raising interest rates next month. In each of the last eight statements prior to a rate increase, Trichet has used a specific tone and language to signal the intent of the governing council, saying that "strong vigilance" is needed to ensure that risks to price stability do not materialize. In terms of economic data, the Euro may remain on the front foot this week as Thursday's ECB monthly bulletin may contain further detail on the outlook for European monetary policy as reiterate the hawkish stance expressed by Trichet last week. Elsewhere, German manufacturing data may show that factory orders fell 0.6% in June following a significant increase of 3.2% in May while the annual growth rate may rise to 10.7%.

The Pound resumed the upward momentum against the Dollar last week and also remained relatively strong versus the Euro despite the Bank of England's decision to leave interest rates unchanged at 5.75%. However, the UK currently has the highest borrowing costs of all the G7 nations and therefore is still an attractive proposition to investors looking to get a higher return on their investment. In terms of economic data, the Bank of England's quarterly inflation report will be much anticipated on Wednesday and should provide an insight into monetary policy and the chances of a further rate increase in September. Elsewhere, UK industrial production is expected to show moderate growth in June as manufacturing output rises 0.2% from the previous month. Nevertheless, it can be argued that the Pound is not currently data sensitive as events on global debt and equity markets will set the tone for Sterling, which remains well off the recent highs against the Dollar as risk aversion builds and carry trades are unwound.

Data Released 6th August

UK 09:30 Industrial Production (June)

- Manufacturing Output

GER 11:00 Manufacturing Orders (June)

written by Adam Solomon

The Pound rallied against both the Euro and the Dollar yesterday, rising 0.3% by the close of trading last night following a stronger-than-expected report on the UK manufacturing sector. Growth in factory output accelerated at the fastest pace in three months in July while a gauge of output prices reached a record level, adding to the case for a further interest rate hike in September. The index from the Chartered Institute of Purchasing and Supply climbed to a reading of 55.7 last month from a revised 54.7 in June with a figure above 50 indicating expansion. The index of output prices rose to 57.5, the highest since records began in 1992 and provides an indication that the Bank of England have the scope to raise rates to 6.0% as early as next month. Consumer price inflation has exceeded the Bank's 2.0% target for the past 14-months but the monetary policy committee are expected to keep interest rates on hold in the monthly meeting this lunchtime. As a result, the Pound may come under significant pressure against both the Euro and the Dollar as we have to wait until the 15th August for the release of the minutes of the meeting in order to gauge the chances of a further rate hike next month.

The Euro lost ground against Sterling yesterday but increased 0.2% versus the U.S Dollar as slower manufacturing growth in Germany and France did not hamper the over PMI number, which showed that factory output throughout the whole of Europe accelerated faster than expected. Nevertheless, the report yesterday should have little influence on the European Central Bank's interest rate decision this afternoon where the governing council are expected to leave the benchmark lending rate on hold at 4.0%. Earlier this week, the Euro staged an unlikely rally on the basis that the chairman of the Central Bank, Jean-Claude Trichet, may hold a surprise press conference in the aftermath of the announcement and suggest that an interest rate rise is likely in September. The harmonised consumer price index has recently shown that inflation has moderated to 1.8% over the past month, moving further under the ECB's 2.0% ceiling while the recent volatility in the global equity markets may force Trichet to adopt a more neutral stance with regards monetary policy.

The Dollar declined against both the Euro and the Pound yesterday amid a host of mixed economic data as the ADP employment report showed that U.S companies added fewer jobs than forecast in July. The report, which provides an insight into the Nonfarm payrolls numbers of Friday, showed that companies added 48,000 jobs last month, the smallest amount in over four years. The downturn in the labour market followed a revised gain of 143,000 in June as the worst slump in housing for 17-years combined with slowing consumer spending may have prompted companies to slow hiring. Elsewhere, a separate report from the Institute of Supply Management showed that U.S manufacturing expanded at close to the fastest pace in more than a year last month following a dramatic increase in orders and demand from overseas. The ISM index dropped to a reading of 53.8 in July, which was slightly lower than forecast although the index matched the overall average of last year with a figure above 50 indicating expansion.

Data Released 2nd August

UK 12:00 BoE Policy Announcement

EU 12:45 ECB Policy Announcement

EU 10:00 Producer Price Index (June)

U.S 13:30 Weekly Jobless Claims (w/e 28th July)

U.S 15:00 Factory Goods Orders (June)

written by Adam Solomon

The Dollar failed to capitalise on the recent gains made against the Pound, falling 0.1% over the course of the day while the U.S currency remained largely unchanged versus the Euro following a report on the Federal Reserve's preferred measure of inflation. U.S personal spending increased at the slowest pace in nine months in June while the consumption expenditures index rose just 0.1% as slowing economic growth eases price pressures. The report yesterday will be of concern to policy makers within the Federal Reserve, particularly when you consider that consumer spending accounts for more than two thirds of the economy and has recently supplemented the dramatic slowdown in the housing sector. Nevertheless, robust growth in the labour market combined with rising incomes will prevent spending from slowing even further, a sentiment that was echoed yesterday by a separate market report. U.S consumer confidence climbed more than initial forecasts for July, rising to the highest month-on-month increase in nearly six years following low unemployment and a recent retreat in fuel costs. The Dollar may receive a boost this afternoon amid the release of the ISM manufacturing report, which is expected to show that growth in the sector expanded at close to the fastest pace in more than year last month.

The Euro lost further ground against the Pound yesterday and also came under moderate pressure versus the Dollar as European business and consumer confidence fell by more than expected in July. The EC sentiment index declined to a reading of 111.0 from 111.7 in June as higher oil prices over that period combined with a strong Euro threatens the pace of economic expansion. In addition, a separate report showed that a measure of consumer price inflation slowed to 1.8% this month from 1.9% in June and suggests that the ECB won't need to tighten interest rates in the short-term as price pressures continue to moderate. However, the European economy is expected to expand at roughly 2.6% this year, which is largely in line with expectations and close to the fastest pace in six years achieved in 2006. In terms of economic data, the Euro may continue to decline this morning as the Purchasing Managers' index of European manufacturing is expected to show that growth in the sector eased in July to a reading of 54.8 from 55.6 the previous month.

The recent negative sentiment surrounding the Pound has continued to gather momentum this morning with the UK currency declining against the Dollar and the Euro as traders reduced so-called carry trades on signs that the U.S subprime mortgage crisis is spreading. However, the Pound was the only high-yielding currency to make modest gains against its U.S counterpart yesterday as the FTSE saw the biggest gain in 14-months on speculation that the UK's seventh biggest bank could receive a buyout offer from the National Bank of Australia. In terms of economic data, the Pound stood firm despite a damning report on UK consumer confidence while a separate report from the Confederation of British Industry showed that the industrial trends survey also dropped for August. The Pound may continue to decline against the majors over the course of the day as the CIPS manufacturing survey is expected to show that growth in the sector moderated in July.

Data Released 1st August

UK 09:30 CIPS Manufacturing Survey (July)

UK 10:30 BRC Shop Prices (July)

U.S 13:15 ADP Employment Report (July)

U.S 15:00 ISM (Manufacturing) (July)

U.S 15:00 Pending Home Sales (June)

written by Adam Solomon