Daily Insight

The Pound extended its decline against the majority of the major currencies after a report from the Confederation of British Industry showed that an index of UK retail sales slumped to the lowest level in 25-years as tighter lending conditions restricted borrowing and curtailed spending.

The tone of the report mirrored last week’s sales figures for June and is just the latest indication that the economy is teetering on the brink of recession.

The Pound subsequently lost ground against 15 out of the 16 most actively traded currencies as a separate report from the Bank of England showed that mortgage approvals sank to the weakest level since records began in 1999.

In the aftermath of the report, traders pared bets that the BoE will cut interest rates for the third time this year and risk letting inflation spiral well above 4.0% over the coming months.
The Pound also declined against the Dollar, revisiting the ‘Fibonacci’ support level at 1.9850, before breaking through by the close of trading last night after oil prices slid a further $3 in New York.

The price of crude oil fell to the lowest level in 12 weeks, dropping 17% since hitting a record high earlier this month, amid speculation that demand is weakening.

The geo-political issues in Iran and Nigeria are threatening supply but oil prices declined as the U.S Dollar rallied to a one month high versus the Euro and curbed the appeal of commodities as a hedge against inflation.

The Euro plummeted against the Dollar yesterday and also breached back above 1.2700 by the close last night amid further suggestions that the recent negative tone of economic data means that the European economy is hurtling towards contraction.

The single currency failed to take advantage of broad Sterling weakness despite reports in Germany that the annual rate of inflation held at the highest level in 12-years this month after the surging cost of raw materials forced manufacturers to pass on higher costs to the consumer.
Prices rose 3.4% from this stage in 2007 and faster inflation may accelerate the decline in growth as consumer and business confidence fall to the lowest levels on record.

Nevertheless, the European Central Bank has maintained a staunchly hawkish stance on monetary policy and despite the recent evidence, policy makers still believe that there is room for a further increase in borrowing costs.

The Euro may continue to decline against the majors as the as the EC economic sentiment index is expected to confirm that industrial and consumer growth slipped further into negative territory this month.

The Dollar advanced to the highest level in a month versus the Euro while the U.S currency also made significant gains versus the Pound following a surprisingly positive report on consumer confidence, which provided some optimism that the economy will pull back from the brink of recession.

Elsewhere, the Dollar was largely unaffected despite reports of a further slump in the U.S property market as the S&P/Case-Shiller index showed that house prices fell at a faster pace than anticipated in May.

A separate report showed that the Conference Board’s index of consumer confidence unexpectedly rose higher in June and mirrored the recent report on U.S retail sales, which conveyed a surprising resilient in spending.

The Dollar also found some support as oil prices fell under $123 a barrel last night while the U.S currency rose earlier in the session as reports that Merrill Lynch & Co plans to sell $8.5 billion of stock and bonds raised speculation that the economy is through the worst of the credit crisis.

In terms of economic data, the Dollar’s resolve may tested this afternoon as the ADP
employment index is expected to show a further softening in the U.S labour market and provide an indication of Nonfarm Payrolls on Friday.

Data Released 29th July

EU 10:00 EC Business Climate Index (July)

EU 10:00 EC Economic Sentiment (July)

- Industrial Sentiment
- Consumer Sentiment
- Services Sentiment

U.S 13:15 ADP Employment (July)

written by Adam Solomon