Daily Insight

The Pound continued to decline against the Dollar yesterday, dropping to the lowest level in seven weeks, as UK industrial production slumped for the fourth consecutive month and increased speculation surrounding the probability of an interest rate cut.

According to the report from the Office of National Statistics, factory output fell 0.5% in June despite initial forecasts of a 0.1% increase and the Pound also succumbed to a report on the UK service sector.

An index of business confidence showed that growth in UK service industries remained in negative territory for the fourth straight month and the reports combined show that the credit crisis, falling home values and record energy prices has brought the economy to the brink of recession.

The Pound fell towards the support at 1.9500 versus the Dollar and briefly traded under 1.2600 versus the Euro as the speculation surrounding the BoE interest rate announcement continues to weigh on Sterling sentiment.

The monetary policy committee probably won’t cut interest rates this month after two members of the nine-strong panel reiterated their concerns over rising inflation but the worsening economic outlook means that policy makers may have little choice but to reduce borrowing costs over the coming months.

The Chancellor of the Exchequer, Alistair Darling, felt the need to state the blindingly obvious in an interview with Radio 4 yesterday when he said that “we are going through a tough time that is likely to continue for a while”.

Nevertheless, the Chancellor also highlighted that the Bank of England face the unenviable task of balancing slowing economic growth against the fastest pace of inflation in eleven years and his comments come in the aftermath of reports that HSBC Holdings Plc first half profits declined 29% in losses linked to U.S subprime mortgages.

The Euro declined against the Dollar yesterday as oil prices continued to retreat and European retail sales plunged by the most in at least 13-years in June as record high fuel and food costs left consumers with less disposable income.

Sales in the 15 nations that share the Euro fell 3.1% from this stage in 2007, the largest annual decline since records began in 1995, and was more than double the 1.3% drop anticipated as the Euro-zone economy drifters closer towards contraction.

The renewed appetite for the Dollar continued yesterday as the U.S currency continued to make gains versus the majors after crude oil prices closed below $120 a barrel for the first time in three months amid reports that demand may be affected by a global economic slowdown.

Prices dropped 2.8% in the sessions after growth in U.S and U.K service industries contracted last month while the larger than expected drop in European retail sales means that the economy may slip into a recession in the third quarter.

Oil has dropped over $28 since achieving a record high of $147.27 a barrel on July 11th as record high fuel costs encouraged consumers to rein in spending while traders continue to move away from commodities as a hedge against inflation.

Despite the reported drop in U.S service sector growth, the Federal Reserve elected to keep interest rates at 2.0% last night and indicated that a declining labour market and concerns over the financial sector will delay any increase in borrowing costs.

Data Released 6th August

GER 11:00 Industrial Orders

written by Adam Solomon