Daily Insight

Following on from last week, the Pound took advantage of broad Dollar weakness to rise to the highest level in 2-months and perhaps more significantly the UK currency finally broke through the major resistance at 1.9850 to signal a further move to the upside.

The neutral tone of the FOMC rate announcement last week combined with the price oil rising to $142 a barrel for the first time ever has weighed on Dollar sentiment and the Pound looks set to test the $2.00 level this week as the focus switches to the U.S non-farm payrolls report.

The Pound also made gains against the majority of the 16 most actively traded currencies on Friday and the improvement was hardly surprising since the UK current account deficit narrowed for the first time in three months.

However, a separate report from the Office of National Statistics showed the final estimates for economic growth in the first quarter was revised down due to a drop in services output and slower consumer spending.

Nevertheless, the Pound stood firm in the aftermath of the report as the numbers were largely in line with the Bank of England’s initial forecasts for growth and are what policy makers are relying on to rein in inflation.

In terms of economic data, the Pound may struggle to find support as the sparse supply of economic indicators should indicate further weakness in the economy.

The Purchasing Managers’ index of UK manufacturing and service sector growth is expected to slip below a reading of 50.0 while a separate report on consumer confidence will probably show a further decline in spending.

The Euro has made gains against both the Pound and the Dollar in the past week and the focus this week will inevitably fall on the ECB interest rate announcement on Thursday as policy makers are expected to lift borrowing costs by 25 basis points to 4.25%.

A number of ECB officials have frequently expressed their concerns on rising inflation and the impact on the broader economy but the tone of last month’s statement led to speculation that the Central Bank will implement a series of rate increases despite the mounting downside risks to growth.

The ECB have been quick to stress that a July rate hike would be a one-off and the focus will therefore fall on the tone and language used in the accompanying statement as traders look for any further indication of the probability of a further increase over the coming months.

The Dollar fell to the lowest level in 2-weeks against the Euro on Friday and closed above 1.9900 versus the Pound after the Federal Reserve failed to provide any further indication of a reversal in monetary policy following the most aggressive period of easing in 20-years.

The decline in Dollar sentiment coincides with the price of oil reaching a new record high on Friday while the Dow Jones Industrial Average headed for the worst June performance since the 'Great Depression'.

The focus this week will surely fall on the U.S non farm payrolls report on Friday where employers probably cut jobs for the sixth straight month in June, emphasising the gradual softening in labour market conditions.

Data Released 30th June

U.K 09:30 Consumer Credit (May)

- Mortgage Application

- Mortgage Lending

EU 10:00 Harmonised Consumer Price Index (June)

U.S 14:45 Chicago PMI (June)

written by Adam Solomon

The tentative price action surrounding the Dollar yesterday saw the U.S currency remain little changed against the majors as the market prepared for FOMC rate announcement last night, where the Open Market committee elected to keep interest rates unchanged at 2.0% following an aggressive period of monetary easing.

The outcome of the two day meeting was widely expected but the somewhat bearish tone of the Fed’s accompanying statement indicated that policy makers are still concerned with the outlook of the economy, given the downturn in unemployment, housing and consumer confidence.

Nevertheless, the tone and language used in the statement also showed that although the downside risks to economic growth remain a concern, the Fed believe “they have diminished somewhat” while the “upside risks to inflation and inflation expectations have increased.”

In the aftermath of the announcement, the Dollar declined against the Euro and tested the support at 1.9660 versus the Pound amid increased uncertainty over the prospects of a U.S interest rate hike in September and the possible impact on the broader economy.

The Federal Reserve decided to hold rates after the most aggressive period of monetary easing in 20-years while the Chairman, Ben Bernanke, expects oil prices to moderate over the coming months, which coincides with an earlier report that U.S inventories climbed for the first time in six weeks.

Despite oil prices retreating by $4 at the close last night, the Dollar continued to plummet while a separate report earlier in the session reiterated the Fed’s concerns as sales of new homes extended their decline while orders for U.S durable goods remained unchanged in May.

The overwhelming contraction in the U.S housing market shows few signs of abating while labour market conditions are worsening and consumer confidence slumps to the lowest level in 26-years according to the Michigan sentiment survey.

As a result, the Dollar is struggling amid speculation that a U.S interest rate hike is still months away, while the focus today will fall on the final estimate of gross domestic product in the first quarter and the report is expected to confirm that growth was slightly up on initial forecasts.

The Euro took advantage of broad Dollar weakness and also rallied against the Pound late last night as the stubbornly hawkish stance of European policy makers means that the ECB are the more likely to implement a rate hike over the coming months.

The slightly neutral stance of the Fed’s accompanying statement last night combined with the heightened concerns over the outlook for the UK economy is contrasted perfectly with the hawkish tone from the ECB’S Axel Weber, who again focused on the upside inflationary concerns.

A fundamental lack of UK economic data yesterday means that the Pound was largely reactive to news from the U.S but for a second time this week the Deputy Governor of the Bank of England, John Gieve, poured scorn on the prospects for growth, saying that the worst is yet to come for the UK economy.

Data Released 26th June

EU 09:00 M3 / 3 Month Moving Average (May)

U.S 13:30 Gross Domestic Product (Final Q1)
U.S 13:30 Jobless Claims (w/e 20th June)
U.S 15:00 Existing Home Sales (May)

written by Adam Solomon

The Pound declined against the Euro yesterday after an industry report showed that UK mortgage approvals slumped to the lowest level since Labour came to power in 1997 as traders scaled back the probability of a UK interest rate hike over the coming months.

The Pound slumped against the majority of the 16 most actively traded currencies as the report illustrates the tighter lending restrictions that saw mortgage approvals slump 56% from this stage last year.

As a result, UK house prices could fall as much as 9% in 2008 and the Bank of England face the unenviable task of balancing slowing economic growth against the fastest pace of inflation in a decade.

Although the Pound fell 0.2% against the Euro yesterday, the UK currency took advantage of broad Dollar weakness to break through the 1.9700 barrier before consolidating just under this level at the close.

Nevertheless, the Pound has reached the top of the range on more than one occasion in recent weeks and it would take a move beyond the resistance at 1.9850 to signal a further upside move towards 2.0400.

The Euro stood firm yesterday despite reports in both Germany and France that consumer confidence declined as rising energy costs weighed on household spending and adds to recent evidence that economic growth slowing.

The Euro-zone has remained largely resilient to a U.S led global slowdown but a recent spate of negative economic reports has dimmed sentiment and led to speculation that the European Central Bank face the same dilemma as the Bank of England in balancing upside inflation risks against a slowing economy.

The ECB have been unrelenting in maintaining risks to price stability but an increase in borrowing costs next month could have a negative effect on the broader economy.
Nevertheless, the Euro made further gains against the Dollar yesterday and despite the projected fall in EZ industrial orders, the focus will inevitably fall on the FOMC rate announcement this evening.

The Dollar plunged against the majors yesterday as a government report showed that U.S consumer confidence dropped to the lowest level in 16-years while house prices plummeted in April and reduced the prospect of a U.S interest rate hike later in the year.

The Conference Board’s index of sentiment fell to a reading of 50.4 in June, which was significantly lower than forecast, while a separate report from S&P/Case-Shiller showed that home values fell 15.3% from this stage in 2007.

U.S service industries accounts for more than two thirds of GDP while the worst housing slump in nearly 17-years combined with rising unemployment and higher food and fuel prices means that spending is unlikely to lift the economy from the brink of recession.

The weakening tone of the reports comes in the build up to the FOMC rate announcement this evening and the Fed are expected to keep rates unchanged at 2.0% while the accompanying statement may be hawkish in tone and choose to focus on the rising inflationary concerns.
Data Released 25th June

U.K 11:00 CBI Distributive Trades Survey (June)
EU 10:00 Industrial Orders (April)
U.S 13:30 Durable Goods (May)
U.S 15:00 New Home Sales (May)

written by Adam Solomon
U.S 19:15 Fed Rate Announcement

The Pound enjoyed a strong rally against the majors last week, rising to a high of 1.9755 versus the U.S Dollar, after UK retail sales increased by the most in 22-years last month and reinforced speculation that the Bank of England could raise interest rates to combat inflation.

However, the Pound failed to hold on to last week’s gains yesterday after a report from Rightmove Plc showed that UK house prices plunged by the most this year in June, dropping 1.2% from the previous month to an average price of £239,564.

Tighter lending conditions combined with higher mortgage rates means that fewer people are able to buy while a separate from HBOS Plc predicted last week that prices will fall by as much as 9% in 2008.

Sterling sentiment was further undermined after the Deputy Governor of the Bank of England, John Gieve, concurred with the lender and said that a further decline in house prices will weigh on consumer confidence and dent the prospects of an economic recovery.

Gieve is a member of the BoE’s monetary policy committee who forecast last month that economic growth would slow to the weakest pace since 1992 later this year.
However, consumer prices are expected to breach 4.0% over the coming months and the Bank may have little option but to raise borrowing costs from the current 5.0%.

The Euro declined against the Dollar yesterday and largely failed to capitalise on broad Sterling weakness after the Ifo index of business confidence in Germany showed that sentiment fell this month to the lowest level since 2005.

A separate report from the Royal Bank of Scotland showed that Europe’s manufacturing and service industries unexpectedly contracted this month and reduced speculation that the ECB will raise interest rates in July.

The index of sentiment slumped to a reading of 49.5, the lowest level in five years and the reports combined provide an indication that an increase in borrowing costs would hurt economic growth.

The recent hawkish rhetoric from a number of ECB officials combined with the recent upturn in consumer prices has seen the market factor in a good chance of a quarter-point hike in July.
However, the Euro declined against the Dollar as the reports also signal that the Central will face the same problems as the BoE in balancing to the downside risks to growth against rising inflationary pressures.

The tentative price action surrounding the Dollar suggests the market’s gave is fixed towards the FOMC interest rate decision on Wednesday evening while the oil summit in Jeddah this weekend will attract particular interest. The Dollar may find some support amid hopes that Saudi Arabia will drive down the price of oil with news on increased production.

However, the prior announcement on supply failed to make any groundbreaking impact on prices while the most important members of OPEC will be absent from the meeting altogether.
The Dollar may find some support in the build up to the FOMC announcement tomorrow and after the Fed cut rates by 325 basis point over an aggressive period of monetary easing, the Reserve Bank are expected to pause this month.

The accompanying statement may also be hawkish in tone given that some policy makers have been talking up the rising inflationary concerns, which could signal a possible increase before the end of the year.

In terms of economic data, the Dollar could make further gains against the majors this afternoon as a government report is expected to show that U.S consumer spending rose by the most in six months as confidence improved despite the escalating price of fuel.

Data Released 24th June

U.S 14:00 Case / Shiller House Prices (April)
U.S 15:00 Consumer Confidence (June)

written by Adam Solomon

The Pound rallied to the highest level in more than three weeks versus the Euro yesterday while the UK currency also enjoyed a strong intraday move against the Dollar after a report showed that retail sales in May rocketed by the most since records began in 1986.

The report from the Office of National Statistics showed that sales rose 3.5% from April, the most since the series began almost 22-years ago, and that’s despite forecasts of a further 0.1% drop.

Record high food and energy costs combined with the warmest May on record conspired to bring sales to an astonishing 8.1% year-on-year last month despite tighter lending conditions and falling home values.

The unexpected resilience in consumer spending comes in the aftermath of a statement of the Governor of the Bank of England, Mervyn King, who stated that policy makers won’t flinch in their fight against inflation and are prepared to let British living standards slip.

The report on sales yesterday will provide some much needed support to the MPC and the Pound rallied against all of the 16 most actively traded currencies amid speculation that policy makers will raise interest rates over the coming months despite fears that a quarter point increase could propel the economy towards a recession.

The Dollar rallied against the Euro yesterday for the first time in four sessions as the significance of the unexpected surge in UK retail sales led traders to sell the Euro into the U.S currency and buy back the Pound.

The Dollar subsequently increased 0.2% versus the Euro and clung on to those gains despite reports that manufacturing in the Philadelphia region contracted by more than anticipated in June as orders continued to weaken.

The Philly Fed index dropped to a reading of 17.1 in June to record the seventh consecutive month of contraction as the worst housing slump in 17-years cut production while a slump in consumer spending has weighed on demand for durable goods.

Factories have been forced to cope with record high oil prices and the report yesterday showed that a gauge of raw material expenses surged to the highest level in nearly 28-years, which indicates that rising prices are hurting profits and causing job cuts.

Data Released 20th June

GER 07:00 Producer Price Index (May)

The Pound continued to decline against the Euro yesterday, dropping towards the weekly low at 1.2570, following the release of the minutes from the Bank of England’s June policy meeting where it emerged that the committee voted 8-1 in favour of holding interest rates this month.

Policy makers did acknowledge the persistent inflationary concerns that threaten to plunge the economy into a recession as the accompanying statement showed that some members even considered an increase in rates with David Blanchflower the sole voice for a reduction.

The Pound also declined for a second consecutive day against the Dollar as inflation reached a decade high of 3.3% in May, prompting the Governor Mervyn King to concede that the future on interest rates is “uncertain” and that consumer prices may exceed 4.0% by the end of the year.

The Bank of England face a difficult balancing act at present as oil prices continue to seek new highs, stoking the already elevated inflationary concerns while an increase in borrowing costs would stall the economy and substantially increase the possibility of a recession.

It is no surprise that the BoE, along with most central Banks around the world, are beginning to a adopt a tightening bias on monetary policy but at 5% the U.K benchmark rate is the highest among the Group of Seven nations and policy makers are therefore more likely to keep rates on hold over the coming months.

The tone of the report failed to boost Sterling sentiment and the UK currency remained lower against the both the Dollar and the Euro as the focus switches to the retail sales survey released this morning.

The Poond may find some much needed support as sales are expected to increase 4.4% year-on-year in May, reflecting the sharp increase in food and fuel costs while warmer weather will help boost activity.

The Euro edged higher against the Dollar yesterday but the gains may be limited as both the Euro-zone and U.S economic calanders were devoid of any market moving data.

A gauge of manufacturing output showed that activity in the Euro-zone had declined by slightly less than the previous month while yet another hawkish rhetoric from an ECB governing council member continued to talk up the possibility of a July rate hike.

A statement from ECB policy maker Juregen Stark reiterated the underlying feeling that inflation is top priorty after concumser prices reached the fastest pace in 16-years.

Amid a fundamental lack of U.S economic data released yesterday, the Dollar weakened against the majoirty of the 16 most actively traded currencies despite mounting speculation that the Federal Reserve are considering a rate hike in the third quarter.

Fed Fund futures are currently pricing in a 92% chance of a rate increase in September but with it being election year the fear is that a hike in borrowing costs could create unwanted political implications although the Fed's decision on policy does not require approval from the President or Congress.

Data Released 19th June
U.K 09:30 Retail Sales (May)
U.K 09:30 PSNCR (May)
U.S 13:30 Jobless Claims (w/e 13th June)
U.S 15:00 Leading Indicators (May)
U.S 15:00 Philly Fed Business Survey (June)

written by Adam Solomon

The Pound declined heavily against the majors yesterday, falling by the most in two weeks versus the Euro while also revisiting the support at 1.9500 against the Dollar after UK consumer prices increased beyond expectations in May and fuelled speculation that an increase in rates will stifle economic growth.

The hotly anticipated report from the Office of National Statistics conveyed the message that UK inflation reached the highest level since the Labour Party came to power in 1997 and the Governor of the Bank of England, Mervyn King, will be forced to write a letter of explanation to the Chancellor Alistair Darling.

The Pound snapped two days of gains against the Dollar as the report showed that prices increased 3.3% from this stage last year and King has predicted that inflation will exceed 4% over the coming months, which will curtail the pace of economic growth and push the economy close towards a recession.

The focus this morning will inevitably fall on the release of the minutes from the Bank's last policy meeting and the voting pattern of the nine-strong committee will be closely watched to determine the chance of a UK interest rate hike in July.

At least one member of the MPC is expected to have voted for a cut in June with David Blanchflower advocating that the risks to economic growth outweigh the current threat of inflation. The tone and language used in the accompanying statement will also be heavily scrutinized but the Pound is unlikely to find any support unless the committee voted unanimously to hold rates this month.

The positive momentum surrounding the Euro and the prospect of an interest rate hike in Europe has seen the single currency rally for a second consecutive day against the Dollar despite reports that investor confidence in Germany fell to the lowest level in over 15-years.

The ZEW Centre for European Economic Research said that its index of investor and analyst expectations fell to the lowest level since December 1992 as rising inflationary concerns weigh on the outlook for the economy while the prospect of a July rate increase may exacerbate the slowdown.

Record high commodity prices, combined with a strong Euro and weakening demand from overseas means that the economy is unlikely to sustain the fastest pace of expansion in seven years as host of recent reports indicates that cracks are beginning to show in the economy with Europe no longer immune to a U.S led global recession.

Nevertheless, the Euro continued to rally against the majors as the market anticipates a series of rate hikes this year following a series of hawkish statements from a number of ECB officials who still view inflation as the single biggest threat to the economy.

The Dollar has struggled to stem the tide against the Euro this week and the U.S currency may continue to decline today as a spate of U.S economic weakness promotes speculation that the Federal Reserve will refrain from increasing borrowing costs this year.

The Dollar recorded widespread losses against the majors yesterday despite oil prices retreating from a record $140 a barrel on Monday but a report on the depleted U.S housing market showed that builders broke ground on the fewest number of new homes for 17-years.

Data Released 18th June

U.K 09:30 BoE MPC Minutes (4/5 June Meeting)

U.K 11:00 CBI Industrial Trends Survey (June)

written by Adam Solomon

The Pound rallied against both the Dollar and the Euro yesterday amid speculation that UK inflation will exceed the Bank of England’s target in May and consumer prices may edge above 3.0% for a second month in a row.

The UK currency staged a strong intraday move against the Dollar, rising to a high of 1.9685 during the European session, while the Pound also peaked above 1.2700 versus the Euro as the possibility of a UK interest rate hike improves by the day.

The release of the UK consumer price index this morning has promoted speculation that the Bank of England will keep interest rates on hold for the remainder of the year in an attempt to tame inflation.

The report is expected to show that prices reached 3.2% year-on-year in May and a reading of 3.1% or higher would force the Governor of the Bank of England, Mervyn King, to write of letter of explanation to the Chancellor Alistair Darling.

The last letter was published in April 2007 and given that oil prices continue to climb, reaching a high of $140 a barrel yesterday, the subsequent impact on inflation will probably see prices rise towards 4.0% over the coming months.

The short-term momentum surrounding the Pound means that Euro and Dollar buyers would be well placed to take advantage of the current rate or at least place a stop order in the market to protect against an adverse reaction to the CPI numbers.

The Euro staged a modest rebound against the Dollar yesterday, rising as much as 0.7% by the close of trading last night after an EU report showed that inflation in the Euro-zone accelerated at the fastest pace in 16-years and exceeded initial forecasts last month.

The harmonised index of consumer prices showed that inflation soared to 3.7% year-on-year in May, the highest level since June 1992, as food and energy costs continue to rocket higher and pose a “more complicated” dilemma for the ECB.

Officials from the Group of Eight nations said yesterday in a meeting in Japan that rising commodity prices are posing a serious challenge to economic growth and the ECB President, Trichet, responded by indicating that policy makers could raise interest rates in July.

Nevertheless, the Euro failed to hold firm against the Pound and the single currency may struggle to make gains this morning as the focus switches to the ZEW index for investor confidence in Germany.

The Dollar endured a torrid day against the majors yesterday as a combination of weakening domestic demand and rising oil prices saw the U.S currency plunge 1.1% against the Pound and fall by the most in over a week versus the Euro.

The Empire state manufacturing index showed that activity in the New York region contracted by more than expected this month following a sharp downturn in consumer spending and business investment.

The dramatic slump in housing and home construction shows few signs of slowing while sales of U.S autos have fallen to the lowest level in 15 years, which is hurting U.S factories and threatening to cause more job cuts.

Data Released 17th May

U.K 09:30 Consumer Price Index (May)

- Retail Price Index

GER 10:00 ZEW Index (June)

EU 10:00 Foreign Trade (April)

U.S 13:30 Housing Starts (May)

- Permits

U.S 13:30 Producer Price Index (May)

- Ex Food & Energy

U.S 13:30 Current Account (Q1)

U.S 14:15 Industrial Production (May)

- Capacity Utilisation

written by Adam Solomon

Following on from last week, the Pound surged higher against almost all of the 16 most actively currencies except the Dollar as oil retreated and U.S consumer prices increased beyond initial estimates in May.

Despite a weakening labour market and reports that UK economic growth stalled in the first quarter, the Pound rallied higher against the Euro as the focus this week switches to the minutes from the Bank of England’s last policy meeting.

Although policy makers have acknowledged the current risks to economic growth are worsening, the tone of the report will probably reiterate the rising inflationary concerns that kept the BoE from lowering UK interest rates in June.

The voting pattern of the nine strong committee will also be closely watched as a resounding 9-0 in favour of no change will probably support the Pound.

The annual pace of inflation has reached the government’s 3.0% limit and the latest numbers will be of particular interest on Tuesday with consumer prices expected to increase 0.5% in May and 3.2% from this stage last year.

Despite a host of hawkish statements from a number of ECB officials over the past week, the Euro came under additional selling pressure on Friday as it emerged that Irish voters would reject the Lisbon treaty.

Although the news has weakened the Euro in the short-term and dealt a significant blow to the European Union the impact of the Irish rejection of the treaty will be limited.

The Euro has dropped to a near three month low versus the Dollar and the single currency may struggle to make gains this week amid a distinct lack of economic data released in the Euro-zone.
The focus will fall on the German ZEW survey for investor confidence, which is expected to fall further this month as inflation continues to accelerate and evidence mounts of slowing economic growth.

The Dollar recorded its biggest weekly gain against the Euro in almost three-years last week and consolidated under the support at 1.9500 versus the Pound as the prospects of a U.S rate hike over the coming months increased.

The improved outlook for the economy combined with rising inflationary concerns means that policy makers may lift rates from 2.0% as early as August after U.S consumer prices increased drove the annual pace of growth to 4.2%.

Data Released 16th June

EU 10:00 Harmonised Consumer Price Index (May Final)

U.S 13:30 Empire State Index (June)
U.S 14:00 TICs Capital Flows (April)
U.S 18:00 NAHB Housing Market Index (June)

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The recent revival in Sterling sentiment was severely tested yesterday as the UK currency recorded the biggest intraday slide in nearly a month versus the Dollar after a report from the Royal Institution of Chartered Surveyors showed that the slump in house prices exceeded initial expectations.

The RICS housing index showed that the number of estate agents and surveyors reporting falling prices exceeded those reporting gains by 92.9 percentage points in May as the crisis in credit means that mortgage lending has declined to the lowest level in at least thirty years.

A significant drop in home loans means that prices are likely to fall further over the coming months but the Bank of England can’t afford to lower interest rates even as the economy edges closer towards a recession.

The Pound has enjoyed a three-day winning streak against the Dollar since Friday after a report on UK producer prices showed that factory-gate inflation accelerated at the fastest pace since 1986 and may force the Bank of England to raise interest rates.

Tighter lending conditions and falling home values is likely to weigh on consumer sentiment but a separate report from the British Retail Consortium showed that sales still rose 1.9% from this stage in 2007.

Although the Pound slipped versus the Dollar, the UK currency rallied higher against the majority of the 16 most actively traded currencies as the rebound in sales coincided with an unexpected increase in manufacturing output.

However, the Pound may come under some pressure this morning amid a plethora of economic data due for release in the UK with unemployment expected to increase to 2.6% in May but the monthly trade report is forecasted to show that the deficit in goods and services actually shrank in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports in Germany that wholesale prices surged by the most in 26-years last month, indicating that inflation threatens to entrench the economy.

Wholesale prices rose 8.1% year-on-year in May, the highest since 1982, while the report will only serve to increase speculation that the European Central Bank will need to raise interest rates in July while balancing the inherent downside risks to economic growth.

The resurgent U.S Dollar rallied higher against the Pound yesterday and also recorded the biggest two day increase versus the Euro since 2005 as the Chairman of the Federal Reserve, Ben Bernanke, joined the Treasury Secretary in announcing that economic risks have subsided.

The recent spate of hawkish sentiment surrounding the future outlook of the U.S economy has seen traders increase the probability of an interest rate hike while a rebound in economic fundamentals is likely to support the Dollar over the coming months.

Policy makers seem determined to support the Dollar and prevent any further downside momentum after the U.S currency depreciated to a record low against the Euro earlier this year.

In term of economic data, the Dollar stood firm despite reports that the U.S trade deficit unexpectedly widened in April as surging import prices saw the gap in trade grow 7.8% from the previous month.

Data Released 11th June

U.K 00:01 NIESR GDP Estimate (3 months to May)
U.K 09:30 Average Earnings (3 months to May)
U.K 09:30 Claimant Count / Unemployment (May)
U.K 09:30 Trade Balance (April)

U.S 19:00 Federal Budget (May)
U.S 19:00 Fed Beige Book Released

The recent revival in Sterling sentiment was severely tested yesterday as the UK currency recorded the biggest intraday slide in nearly a month versus the Dollar after a report from the Royal Institution of Chartered Surveyors showed that the slump in house prices exceeded initial expectations.

The RICS housing index showed that the number of estate agents and surveyors reporting falling prices exceeded those reporting gains by 92.9 percentage points in May as the crisis in credit means that mortgage lending has declined to the lowest level in at least thirty years.

A significant drop in home loans means that prices are likely to fall further over the coming months but the Bank of England can’t afford to lower interest rates even as the economy edges closer towards a recession.

The Pound has enjoyed a three-day winning streak against the Dollar since Friday after a report on UK producer prices showed that factory-gate inflation accelerated at the fastest pace since 1986 and may force the Bank of England to raise interest rates.

Tighter lending conditions and falling home values is likely to weigh on consumer sentiment but a separate report from the British Retail Consortium showed that sales still rose 1.9% from this stage in 2007.

Although the Pound slipped versus the Dollar, the UK currency rallied higher against the majority of the 16 most actively traded currencies as the rebound in sales coincided with an unexpected increase in manufacturing output.

However, the Pound may come under some pressure this morning amid a plethora of economic data due for release in the UK with unemployment expected to increase to 2.6% in May but the monthly trade report is forecasted to show that the deficit in goods and services actually shrank in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports in Germany that wholesale prices surged by the most in 26-years last month, indicating that inflation threatens to entrench the economy.

Wholesale prices rose 8.1% year-on-year in May, the highest since 1982, while the report will only serve to increase speculation that the European Central Bank will need to raise interest rates in July while balancing the inherent downside risks to economic growth.

The resurgent U.S Dollar rallied higher against the Pound yesterday and also recorded the biggest two day increase versus the Euro since 2005 as the Chairman of the Federal Reserve, Ben Bernanke, joined the Treasury Secretary in announcing that economic risks have subsided.

The recent spate of hawkish sentiment surrounding the future outlook of the U.S economy has seen traders increase the probability of an interest rate hike while a rebound in economic fundamentals is likely to support the Dollar over the coming months.

Policy makers seem determined to support the Dollar and prevent any further downside momentum after the U.S currency depreciated to a record low against the Euro earlier this year.

In term of economic data, the Dollar stood firm despite reports that the U.S trade deficit unexpectedly widened in April as surging import prices saw the gap in trade grow 7.8% from the previous month.

Data Released 11th June

U.K 00:01 NIESR GDP Estimate (3 months to May)

U.K 09:30 Average Earnings (3 months to May)

U.K 09:30 Claimant Count / Unemployment (May)

U.K 09:30 Trade Balance (April)

U.S 19:00 Federal Budget (May)

U.S 19:00 Fed Beige Book Released

written by Adam Solomon

The Pound rallied higher against the majors on Monday, rising towards 1.2600 versus the Euro by the close of trading while also consolidating above 1.9700 against the U.S Dollar after a report from the Office of National Statistics showed that UK producer prices increased at the fastest pace in at least twenty years last month.

The index provides a measure of factory-gate inflation and indicated that record high commodity prices will force manufacturers to pass on higher costs to the consumer, while the Pound rallied on speculation that the Bank of England will refrain from cutting interest rates even as the economy heads towards a recession.

Prices charged by factories actually increased 1.6% in April, the most since records began in 1986 and more than double initial forecasts. The slump in housing and consumer confidence is hurting economic growth but the Bank of England are clearly more focused on the upside risks to price stability after keeping the key interest rate unchanged at 5.0% last week.

The Bank’s reluctance to intervene means that UK interest rates are likely to remain on hold for the time being and are still the highest among the highest of the Group of Seven industrialised nations.

However, policy makers have also said that the pace of UK economic growth will slow to 1.0% in the revised estimate for the first quarter, the least since the months that followed the last recession 17-years ago.

The short-term revival in Sterling sentiment will be severely tested on Tuesday as a report from the British Retail Consortium will confirm a further decline in sales while UK industrial production probably contracted in April.

The Euro declined against both the Pound and the Dollar yesterday despite reports that exports in Germany rose beyond initial forecasts in April.

Sales abroad increased 1.2% from the previous month and the report provides some optimism that healthy overseas demand will help companies cope with the rising cost of energy prices.

The recent statement from the Chairman of the European Central Bank, Jean-Claude Trichet, indicated that policy makers are still pre-occupied with countering rising inflationary pressures despite news from Bundesbank last week that the economy is losing momentum.

The Dollar made significant gains against the Euro yesterday, rising from the lowest level in six weeks, after policy makers emphasised their concerns over the Dollar’s 7% depreciation in value this year.

A statement from the U.S Treasury Secretary, Henry Paulson, showed that policy makers were becoming increasingly concerned with volatile fluctuations in the currency market while the Fed may intervene if the Dollar slide continues.

The familiar tone of Paulson’s comments coincided with a separate statement from the Federal Reserve Bank of New York President, Timothy Geithner, said that the Reserve Bank is monitoring the Dollar closely.

Data Released 10th June

U.K 00:01 BRC Retail Sales (May)

U.K 09:30 DCLG House Prices (April)

U.K 09:30 Industrial Production (April)

- Manufacturing Production

U.S 13:30 Trade Balance (April)

CAN 14:00 BoC Rate Announcement

written by Adam Solomon

Following on from last week, the Pound plunged to the lowest level in over a week versus the Euro and briefly traded under the 1.9500 level against the Dollar before the release of the U.S non-farm payrolls in report on Friday.

As the Bank of England elected to keep UK interest rates unchanged at 5.0% this month, the European Central Bank indicated that rising inflationary pressures may warrant an increase in rates as early as July.

Nevertheless, the BoE can’t afford to reduce borrowing costs in the near term despite recent reports that house prices fell by the most in 15-years in May as tighter lending conditions and weakening consumer confidence increased the probability of a U.S led recession.

The Pound took advantage of broad Dollar weakness on Friday and rallied as high as 1.9700 by the close following the contraction in the latest U.S employment report. However, the Pound will struggle to consolidate of this unexpected upside move as the focus this week switches to the RICs house price balance, which is expected to reflect the further decline in UK home values.

Elsewhere, industrial production is forecasted to slow and the recent increase in job cuts is expected to show an increase in claims for unemployment benefits.

Nevertheless, the Pound may find some support on Monday as a separate report from the office on National Statistics is expected to confirm that UK producer price inflation accelerated to 2.7% year-on-year in May.

The recent revival in the Euro continued last week as the single currency broke through 1.2500 level versus the Pound and looks poised to test the resistance around 1.5800 versus the Dollar following the hawkish commentary from ECB President, Jean-Claude Trichet, last week.

The tone and language used in the Central Bank’s accompanying statement confirmed that policy makers were solely fixed on the upside risks to inflation and may even implement a rate hike in June, increasing the interest rate differential between Euro and the U.S.

In terms of economic data, the Euro shrugged off an unexpected decline in German manufacturing as output dropped 0.8% in April and indicated that growth in the economy may be slowing as a strong Euro and dwindling consumer confidence weigh on domestic demand.

Oil prices increased to a near record high on Friday, stoking the already elevated inflationary concerns as the rising cost of raw material is forcing manufacturers to pass on higher prices to the consumer.

The ECB’s governing council members are clearly less concerned with the declining outlook for growth and are instead more attuned with the imminent threat of inflation. That sentiment was echoed in a statement from ECB policy maker, Axel Weber, who said that financial markets had correctly interpreted the ECB’s message on Thursday as speculation over a July rate hike intensifies.

The Dollar fell by the most versus the Euro since early April and also suffered a sharp intraday decline against the Pound after the monthly U.S job report showed that unemployment reached the highest level in twenty years.

The volatility surrounding the release of the Non-farm payrolls report also led to a significant drop in U.S stocks despite the headline number falling less than initial forecasts.

Payrolls contracted by 49,000 in May and more significantly for the fifth month on a row while a separate gauge of the report plunged to the lowest level since 2003. The sustained increase in the number of jobless claims combined with the influx of students into the labour market for the Summer Break saw the unemployment rate jump by half a percentage point to 5.5% from April to record the biggest monthly increase since 1986.

The Dollar plummeted against the majors on Friday but the U.S currency may find some support on Monday as a report from the Commerce Department is expected to confirm that retail sales probably rose in May.

Data Released 9th June

U.K 09:30 Producer Price Index (May)

- Input
- Output

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

written by Adam Solomon

The Pound fell to the lowest level in two weeks against the Dollar yesterday, closing well under 1.9600 last night after an industry report showed that growth is slowing amid fresh concerns that the downturn in housing and shrinking consumer confidence will send the UK economy to the brink of recession.

Service sector growth unexpectedly contracted for the first time in five years while a separate gauge of the report showed that consumer sentiment fell to the lowest level since the survey began in 2004.

The CIPS index fell to a reading of 49.8 in May and a reading below 50 indicates contraction as companies cut jobs at the fastest pace since 1996. The Pound also declined against the Euro in the aftermath of the report as the focus switches to the Bank of England interest rate announcement tomorrow and despite fresh fears over an economic slowdown, rising inflationary pressures means that policy makers are unlikely to lower borrowing costs.

UK service industries account for roughly three quarters of the economy while industrial production has showed signs of struggling following the record increase in the cost of raw materials.

The Euro rallied higher against the Pound yesterday but the single currency struggled to stem the losses versus the Dollar after European retail sales fell 2.9% in April, which was more than three times initial forecasts as record high fuel and costs weighed on consumer confidence.

The EU report showed that the annual drop in sales was the largest since records began in 1995 while consumer price inflation rose to a 16-year high last month as oil prices doubled in the past year to peak at $135 a barrel.

The data reinforces concerns over the future outlook for the Euro-zone economy but the ECB are determined to focus on fighting inflation with some members of the governing council even suggesting that a rate hike may be necessary in order to rein prices and provide some relief to the consumer.

The Euro fell 0.2% against the Dollar yesterday but the single currency may continue the upside momentum versus the Pound as the ECB Chairman, Jean-Claude Trichet, is expected to reiterate his concerns over inflation.

The recent hawkish rhetoric from the Chairman of the Federal Reserve, Ben Bernanke, has helped the Dollar rally against most of the 16 most actively traded currencies while the upside risks to price stability means that policy makers may even need to raise interest rates by the turn of the year.

In terms of economic data, growth in U.S service industries slowed less than expected in May, following an increase in factory orders and a slowing labour market.

The ISM non-manufacturing index, which accounts for almost 90% of the economy, increased to a reading of 52.0 in April, while a separate report from the labour market showed that non-farm productivity accelerated beyond initial forecasts in the first quarter.

Data Released 5th June
U.K 12:00 BoE Interest Rate Announcement

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

U.S 13:30 Initial Jobless Claims (w/e 31st May)

written by Adam Solomon

The Pound took advantage of broad Euro weakness to breach the 1.2700 barrier by the close of trading last night despite the mounting concerns surrounding the future of the UK’s largest buy-to-let mortgage lender and the biggest slump in the construction industry for at least 11-years.

The report from the Chartered Institute of Purchasing and Supply showed that activity fell as homebuilding stalled and subsequently the index recorded the lowest numbers since records began in 1997.

A separate gauge of the report showed that housing and confidence had also fallen to record lows as a worsening economic climate means that homebuilders are forced to cut jobs.

The crisis in credit has seen the worst downturn in housing since the end of the last recession in 1991 and the Governor of the Bank of England, Mervyn King, has conceded that the economy may contract at some point over the coming months.

However, the Bank’s monetary policy can’t afford to cut interest rates and provide some relief to the economy because the annual pace of inflation met the government’s 3.0% limit in April.
The MPC convene next Thursday for the UK rate announcement and the Pound may find some support as policy makers are expected keep the benchmark lending rate unchanged at 5.0%.

The Euro made widespread losses against the majors yesterday despite reports that European economic growth accelerated by more than initial forecasts in the first quarter, led by an increase in German business confidence and construction spending.

Gross domestic product across the 15 nations that share the Euro increased 0.8% in the revised estimate for the first quarter as companies weathered higher oil prices and a stronger Euro.
Producer price inflation in Europe has accelerated at the fastest pace since October 2000 in the figures released for April, keeping the pressure on the ECB to maintain a hawkish rhetoric and hold interest rates at 4.0%.

Factory prices rose 6.1% from this stage on 2007 as surging food and energy costs means that manufacturers have little choice but to pass on the deficit to the consumer and subsequently stoke the already elevated inflationary pressures.

As a result, the futures market has all but priced out a move in European interest rates this year but the ECB may need to review their stance over the coming months amid a sustained slowdown in manufacturing and service sector growth.

The Dollar rallied to the highest level in two weeks versus the Euro while the U.S currency also consolidated on the recent gains made against the Pound as the Fed Chairman, Ben Bernanke, indicated that the Reserve Bank have finished cutting interest rates.

The rebound in Dollar sentiment again coincided with a drop in oil and gold prices but the comments from Bernanke served to reassure the market that the Federal Reserve are closely monitoring the implications of a weaker Dollar and may intervene as necessary.
Elsewhere, a report from the Commerce Department showed that U.S factory orders increased unexpectedly in April as a weak Dollar helped spur demand from overseas.

The underlying strength in the manufacturing sector is helping supplement the worst slump in housing for nearly twenty years while soaring fuel prices is weighing on consumer sentiment. The Dollar’s short-term momentum may be tested this week as the focus switches to the monthly U.S job report on Friday.

Data Released 4th June
U.K 09:30 CIPS Services PMI (May)

EU 10:00 Retail Sales (April)

U.S 13:30 ADP Employment Report (May)

U.S 13:30 Labour Costs (Q1)

- NonFarm Productivity

U.S 15:00 Services ISM – NMI/PMI (May)

- Business Activity

written by Adam Solomon

The recent revival in Sterling sentiment came to a dramatic end yesterday as the UK currency fell by the most in four weeks against the Dollar after reports that Bradford & Bingley Plc plunged by the most since the lender went public in 2000 and plans to sell shares at a 33% discount.

The UK’s biggest buy-to-let mortgage lender saw its share price plummet 24% by the close of trading last night while the Bank also said that it will sell £179 million in shares to TPG Inc as the housing market continues to deteriorate and mortgage approvals plunge to a nine year low.

The Pound declined heavily against the Dollar and also registered significant losses versus the Euro amid speculation that Bradford & Bingley would need to raise more capital as the Bank’s 2007 profit dropped 48% to £93.2 million following an increase in investment write downs and the sale of assets.

In term of economic data, the Pound also came under pressure as a report on UK consumer credit showed that mortgage lending and approvals fell to the lowest levels since records began in 1999 while manufacturing growth unexpectedly stalled in May.

The report from the Chartered Institute of Purchasing & Supply showed that its index of factory output fell short on initial forecasts and slumped to the lowest level in nearly three years, signalling that the economy is edging ever closer towards a recession.

The drop in consumer credit combined with a 2.5% fall in house prices has prompted traders to raise bets that the Bank of England will cut interest rates this year despite expectations that inflation will exceed the government’s 3.0% limit for the remainder of 2008.

The recent spate of weakening economic reports has weighed heavily on the Euro in recent weeks but the single currency found some much needed support yesterday as European Finance Ministers met in Frankfurt and insisted that inflation was the single biggest threat to the economy after prices accelerated at the fastest pace in 16-years.

The governing council members seemed completely united in their concerns over rising consumer prices and it is now extremely unlikely that the ECB will cut interest rates before the turn of the year.

In addition, the resilience of German exports and the vibrant outlook for the economy was reflected in the unexpected increase in factory orders, which rose 35% from this stage in 2007, indicating that demand from overseas will help the economy cope with a U.S led economic slowdown.

The unrelenting increase in oil prices has seen the Dollar struggle against the majors recently but the U.S currency found some much needed support yesterday as the latest figures showed that manufacturing slowed by less than anticipated in May.

The ISM index showed that output rose to 49.6 last month, up from 48.6 in April as a weak Dollar helped spur demand for U.S made goods and helped factories through a domestic economic slump.

Production increased for the first time in three months while a measure of producer prices climbed to the highest level since 2004, which indicates that the Federal Reserve may have to raise interest rates at the end of the year in order to combat inflation.

Although the increase in production and construction spending will increase optimism that growth in the economy is stabilizing, a government report showed just last week that U.S gross domestic product rose just 0.9% in the first quarter of this year, capping the worst six month performance since 2003.

Data Released 3rd June

EU 10:00 Gross Domestic Product (Q1 Details)

EU 10:00 Producer Price Index (April)

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

written by Adam Solomon