Daily Insight

The Pound rose higher against both the Euro and the struggling Canadian Dollar yesterday despite reports that UK consumer confidence in the economy fell by the most in at least four years last month amid falling home values, rising unemployment and faster inflation.

The index published by the Nationwide Building Society showed that sentiment is at the lowest level since records began in 2004 and the negative tone of the report is just the latest in a series of weak economic data that indicates the economy is hurtling towards as a recession.

The UK economy has grown just 0.1% in the second quarter, the slowest pace in at least three years, and it seems only a matter of time before growth slips into negative territory and the Pound has been struggling on speculation that the Bank of England will need to intervene and cut interest rates this lunchtime.

However, at least two members of the MPC believe that rising inflationary pressures are the chief concern to the economy with Andrew Sentence and Timothy Beasley acknowledging that consumer prices will rise to 4.5% over the coming months.

Therefore, the probability of an interest rate cut is remote and the Pound may rally higher against the majors if policy makers vote to keep interest rates unchanged at 5.0%.

The Canadian Dollar fell to the lowest in a year against its U.S counterpart and registered sharp losses against the majority of the 16 most actively traded currencies after concerns over economic growth as oil prices continued to retreat below $120 a barrel.

Commodities account for roughly half of the nation’s exports while oil prices have plunged over 20% since touching a record high on July 11th. Prices fell further yesterday after a U.S government report showed an unexpected increase in inventories and a surprisingly drop in fuel demand.

The Euro struggled to make gains against the majors yesterday after a report in Germany showed that factory orders unexpectedly fell for a seventh consecutive month in June as record high energy prices hamper business confidence while a strong Euro hampered exports and pushed up production costs.

The unprecedented decline in the outlook for the Euro-zone economy means that growth probably contracted in the second quarter and the ECB may be forced to cut interest rates despite inflation rising to the highest level in 16 years.

The focus today will inevitably fall on the ECB interest rate announcement and accompanying press conference at midday and despite concerns over a recession, the governing council members will probably leave interest rate unchanged at 4.25%.

The tone and language used in the accompanying statement will be heavily scrutinized as traders attempt to gauge the Central Bank’s next move on monetary policy and will be interesting to see if Trichet continues to maintain a hawkish stance on inflation.

The positive momentum surrounding the Dollar continued yesterday as the sharp drop in commodity prices helped boost sentiment while the U.S currency consolidated under 1.9500 versus the Pound despite reports that the Fed will leave interest rates at 2.0% for the remainder of the year.

Elsewhere, the Dollar also shrugged of reports that the struggling U.S mortgage-finance company, Freddie Mac, slashed its dividend by more than 80% after posting a loss in the second quarter that was three times more than initial forecasts.

Data Released 7th August

U.K 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement
EU 13:30 ECB Press Conference

GER 11:00 Industrial Production (June)

U.S 13:30 Initial Jobless Claims (w/e 02 Aug)
U.S 15:00 Pending Home Sales (June)
U.S 20:00 Consumer Credit (June)

written by Adam Solomon