Daily Insight

Following on from last week, the volatility surrounding the Pound is likely to continue as the UK currency initially strengthened against the majority of the 16 most actively traded currencies despite reports that the UK economy matched the slowest pace of growth since 2001.

According to a report from the Office of National Statistics, gross domestic product expanded just 0.2% in the revised figures for the second quarter with the economy growing just 1.6% from this stage in 2007.

A number of key industries have reported a contraction in growth with manufacturing and services both slipping into negative territory while the impact of the credit crunch and a larger drop in UK consumer spending have increased the probability of a recession.

The outlook for the economy is at its weakest since the early 1990s and is eroding support for Gordon Brown’s Labour government, which suffered a hammering blow in the Glasgow by elections last week.

Tighter lending conditions is weighing on consumer’s ability to spend while falling house prices have suffocated growth but the Bank of England are reluctant to lower interest rates at inflation accelerates at the fastest pace in a decade.

Nevertheless, the Pound rallied in the aftermath of the GDP numbers as the 0.2% increase matched the result from the previous quarter and showed that at least the economy hadn’t declined any further.

However, the UK currency erased any earlier gains as broad Dollar strength brought the market back towards 1.9900 by the close of trading on Friday and in a relatively quiet week in terms of market data, the Pound may struggle to bounce back against the majors amid the release of the Nationwide and Hometrack house price surveys.

The Euro has remained in a tight trading range against the Pound and despite last week’s move towards the resistance at 1.2760, the market came back to find support at 1.2650 amid hawkish commentary from a number of ECB officials.

Despite concerns that European economy slipped in negative growth in the second quarter, the Central Bank has been determined to bring inflation back down from the highest level in 16-years.

The Euro also strengthened marginally against the Dollar as German import prices rose 1.5% in June while governing council member, Klaus Liebscher, said that the Central Bank has the room to raise interest rates again and prevent second round effects.

The renewed appetite in Dollar sentiment has coincided with the remarkable fall in oil prices as crude oil consolidated under $125 a barrel despite concerns over supply in Iran and the threat of militant attacks in Nigeria.

Elsewhere, the U.S currency also found some support as index of consumer sentiment showed that confidence unexpectedly increased in July, rising from the lowest level since 1980 as tax rebates and a rally in the stock market improved optimism.

The University of Michigan final index of consumer sentiment increased to a reading of 61.2 in July and although the survey will come as a blip in an otherwise weak strain of economic data, the report does provide some hope that the economy can bounce back in the second half of the year.

Data Released 28th July

U.K 00:01 Hometrack House Prices (July)

written by Adam Solomon