Following on from last week, The Dollar came under increased pressure on Friday following the release of the advanced GDP report for the second quarter and as widely expected, economic growth has slowed significantly in the States from 5.6% in the first quarter to just 2.5% in the second and it now looks evermore likely that the Federal Reserve will hold interest rates at 5.25% at the next FOMC rate announcement on the 8th August. As a result, the Dollar declined against the majors, closing back above 1.8600 versus the Pound and with a host of significant economic data released this week, we can anticipate further market volatility in the build up to the Fed’s announcement. The focus this week in terms of U.S data with be the Nonfarm Payrolls report on Friday where it is anticipated that the economy added 150,000 new jobs in July while the unemployment rate is predicted to stay unchanged at 4.6%. There is some significant data released this afternoon in the States with the Chicago PMI widely expected to remain at an elevated level in the figures for July with manufacturing and production showing a modest decline towards 56.0 from 56.6 in June.
Without doubt, the focus this week will be on the ECB interest rate announcement on Thursday where it is widely anticipated that the policy makers will lift interest rates to 3.0% in August as the Euro-zone economy continues to show robust signs of growth. In addition, the accompanying press conference should provide an indication of the ECB’s intention to continue monetary tightening in the in the third and fourth quarters with many investor’s pricing in two further rate hikes before the turn of the year as energy prices continue to soar and inflation remains outside of the Central Bank’s comfort zone. Therefore, the economic data released today will take on added significance as the initial estimate for July inflation is widely expected to remain high at 2.4%, showing just a modest drop from the previous month, which may prompt the ECB to continue raising interest rates. In addition, the Euro-zone sentiment index for consumer and industrial confidence is also released today and forecasters are anticipating a strong figure and sentiment continues to remain high following the staging of the World Cup in the region this Summer.
The Pound has shrugged off some mixed data in the UK over the past week and the Bank of England’s interest rate announcement on Thursday is a close call with many investor’s anticipating a possible rise in UK interest rates in August for the first time in 12 months as faster economic growth and higher inflation may prompt the BoE to tighten rates quicker than previously expected. There is a plethora of significant data released in the UK this week to accompany the rate announcement, most notably the CIPS Manufacturing and Services surveys, while elsewhere UK consumer confidence is widely expected to remain unchanged in July. In addition, Consumer Credit for June is also released this morning and forecasters are anticipating that Net mortgage lending has risen while mortgage approvals have also increased from 117,000 in May.
Data Released 31st July
UK 10:30 Consumer Confidence (July) UK 09:30 Consumer Credit (June) – Net Mortgage Lending – Mortgage Approvals
EU 10:00 Sentiment Index (July) – Industrial Confidence – Consumer Confidence
The Dollar has been trading around 1.8550 versus the Pound for the majority of this morning’s session as we build up to the release of the PCE Deflator and the advanced GDP report in the States, which is the Fed’s preferred measure for U.S inflation. It was widely expected that economic growth would slow significantly to around 3.0% in the second quarter from 5.6% previously. The Deflator actually came out at 3.3% while GDP slowed to 2.5% which was under expectations and it looks as though the Fed will now hold interest rates at 5.25% on the 8th August. The Dollar has weakened significantly to trade back above 1.8600 on the release of the figure.
The volatility surrounding the U.S Dollar continued yesterday as a report from the Federal Reserve showed that U.S economic growth was slowing in the second half of the year while inflationary pressures are at modest level. Therefore, the possibility of a further tightening of U.S interest rates next month looks increasingly unlikely and that sentiment is weighing heavily on the Dollar as we trade uptowards 1.8700 against the Pound. However, there was some positive economic data released in the States yesterday afternoon as orders for U.S made durable goods rose by more than forecast in June, which provides an indication that manufacturing is likely to remain at an elevated level while the housing market continues to show signs of cooling. Following the Fed’s aggressive stance towards monetary tightening, the housing market has continued to decline and that was emphasised in the data released yesterday as the sales of new homes fell by 3.0% in June, which leaves a record number of unsold homes floating on the market and may prompt builders to shed prices.
There is some hugely significant inflation data released this afternoon in the States, which has the potential to influence the Fed’s decision on rates next month. The rate of economic growth is widely expected to decelerate to 3.0% in the second quarter from 5.6% previously and therefore justifies the Fed’s intention to hold interest rates at 5.25%. However, while a slowdown in growth is anticipated the GDP deflator and Employment Cost Index will be watched closely for direction on U.S inflation and both are expected to accelerate in the second quarter.
The Euro has looked relatively strong in recent sessions but we closed above 1.4600 against the Pound last night following a sparse supply of economic data released. However, growth in the M3 money supply into the Euro-zone is widely expected to remain at an elevated level in June, which may prompt the ECB to continue raising interest rates. Elsewhere, French unemployment is expected to remain unchanged at 9.1% in June while consumer confidence is widely anticipated to show a marginal decrease. The ECB interest rate announcement is less than a week away and forecasters are anticipating that the Central Bank will hike rates by a further quarter-point for the fourth time this year and take their benchmark interest rate upto 3%.
Data Released 27th July
EU 09:00 M3 Money Supply (June) – 3 month moving average
The Euro has been making gains against the Pound this week after we failed to break the resistance level at 1.4675. As we predicted, we have subsequently continued to trade down under 1.4600 and the Euro remained firm yesterday despite business confidence in Germany dropping by more than expected in July. The Ifo Index reported that confidence in Europe’s largest economy declined to 105.6 from the 15-year high in June as record oil prices and rising interest rates threatens to slow economic growth. Following the escalating conflict in the Middle East, the price of crude oil reached a record $78.40 a barrel and coupled with a further tightening of Euro-zone interest rates, it seems that business confidence may continue to slow in the second half of the year. However, the Euro was relatively unchanged on the release of the negative data and made further gains against the majors by the close last night, which gives us an indication that the Euro will continue to strengthen in the build-up to the ECB interest rate announcement next week. We have already seen further market movement this morning as German consumer confidence rose to the highest level in 5-years, thanks largely to the staging of the World Cup in the region, but primarily due to the increase in sales tax that will come into force next year as households became more willing to spend.
The Pound remained relatively unchanged during yesterday’s session despite the CBI Industrial Trends Survey improving by less than expected in July. UK Manufacturing has staged a decent recovery this year but the slight fall in orders this month is consistent with the PMI survey. Without any significant data released in the UK for the remainder of this week, the Pound may be open to attack but due to a host of positive economic data, it does seem increasingly likely that the Bank of England will lift interest rates at some point in the fourth quarter.
The Dollar has relinquished much of the positive sentiment that built up following the release of strong consumer confidence data and a better than expected report on the sales of existing homes earlier this week. It was widely expected that the Fed’s aggressive policy towards raising interest rates would have a devastating effect on the U.S housing market but over the past two months, the sales of new and previously owned homes has continued to post better than expected results. Therefore, the Dollar strengthened on speculation that the Fed may need to continue tightening interest rates beyond the current 5.25%. However, in the past 24hrs expectations have dramatically shifted away from an impending rate rise as the Fed’s Beige Book, which reports on economic conditions two weeks prior the monetary policy meetings, reported that consumer sentiment is slowing while inflationary pressures are at a ‘modest’ level. This will heighten speculation that the Fed will hold U.S interest rates for the first time in almost 18-months and as a result, the Dollar declined significantly against the majors, trading towards 1.8600 against the Pound and above 1.2750 versus the Euro.
Data Released 27th July
U.S 13:30 Durable Goods Orders (June) U.S 13:30 Weekly Jobless Claims (w/e 22nd July) U.S 13:30 New Home Sales (June)
The Dollar has staged an unlikely rally against the Pound this week and we saw further gains yesterday following the release of some key data in the U.S with Consumer Confidence unexpectedly rising to a three month high in July. It was widely anticipated that confidence amongst the American consumer would decline to a reading of 104.7 this month but the index actually rose to 106.5 despite the obvious decline in U.S home sales on spending. It seems evident that consumer confidence is currently being fuelled by a strong labour market and gains in personal income, which have thus far supplemented rising petrol prices and higher interest rates. In addition, existing home sales in the States fell by less than expected in the figures for June, falling to an annual rate of $6.62 million, which was slightly above forecast and the predicted decline of the U.S housing market is not supported in the recent surveys. The Dollar made significant gains on the release of the strong data as we closed around 1.8400 against the Pound with investor’s raising expectations of a further tightening of U.S interest rates in August.
The Pound has been gaining in recent weeks on speculation that the Bank of England will finally lift UK interest rates for the first time in nearly 12 months as the economy grows at the fastest pace in two years and inflation continues to show signs of accelerating beyond the government’s 2% target. However, due to a sparse supply of data released this week the Pound has relinquished some of the recent gains, particularly against the Euro, but the CBI industrial trends survey is released this morning and it is widely expected to remain at a high level as the recovery in UK manufacturing continues to show signs of growth.
The Euro has been making steady gains against Sterling after we failed to break the resistance level at 1.4675 earlier this week and we may see further strength this morning with the release of the German Ifo index for July. Business confidence in Europe’s largest economy rose to the highest level in 15-years in June and although we expect to see a modest decline to 105.9 this month the Ifo will still point to robust growth in German GDP in the second quarter. In addition, Retail Sales in Germany is widely expected to show an increase in sales of upto 3.0% in June as the country reaps the benefits of staging the World Cup this summer.
Following a quiet day in terms of economic data released, there was some renewed appetite for the Dollar in early trading yesterday as investor’s looked for a relative safe haven amid continued turmoil in the Middle East and speculation increased that the Federal Reserve would lift interest rates one last time in August before pausing at 5.50%. However, some speculators have argued that yesterday’s move can be attributed to a ‘correction from last week’s sell off rather than be driven by any new fundamental developments’. There is some significant data released in the States today that could potentially shift rate expectations with U.S Consumer Confidence set to decline from 105.7 to 104 in July as a dramatic increase in petrol prices continues to weigh on consumer sentiment and household spending. In addition, the U.S housing market in particular has been in retreat due to the aggressive tightening of interest rates over the last two years and the Sales of Existing Homes is widely expected to drop in June following an unexpected rise in May.
The recent positive sentiment surrounding the Pound was prematurely cut short yesterday amid a disappointing retail report with the CBI Distributive Trades Index unexpectedly dropping to 7 from a reading of 9 in July as the increase in sales at the start of the Summer moderated after the conclusion of the World Cup. In addition, the Pound was hampered further from comments from the Deputy Prime-minister, John Prescott, who hinted at a possible timetable for Tony Blair’s resignation while elsewhere, the seasonally adjusted three-month report for UK car production dropped by much more than expected, falling from 1.6% to 0.4% in June.
The Euro has been suffering in recent weeks and that trend seemed to continue yesterday dropping by 0.6% against the Dollar to close just above 1.2600. However, against Sterling the resistance level at 1.4675 has held firm in the last 24hrs and the trend looks to be peaking around this level. Therefore, Euro buyers may wish to place a stop order in the market to ensure against adverse market movement in order to take advantage of the current rate of exchange as we draw ever closer to the ECB announcement next week. In terms of economic data released, the focus today will fall upon the Business Confidence reports in France and Italy while elsewhere, the Current Account Balance is widely expected to show a marginal deficit in May from the previous month.
Following on from the last week, the Pound made significant gains against the Euro and the Dollar as speculation intensifies that the Bank of England will need to raise UK interest rates for the first time in eleven months to cope with the threat of rising inflation. A strong pick-up in retail sales and the Consumer Price Index pushed Sterling towards 1.8500 versus the Dollar at the close on Friday while the Euro is still being hampered by the ongoing conflict in the Middle East as we ended the week at 1.4650. In addition, UK economic growth accelerated at the fastest in pace two years in the second quarter, which provides further evidence that the BoE will have to lift interest rates from the current 4.50% and forecasters are anticipating that the MPC could shift rates as early as next month. There is a sparse supply of significant data released in the UK this week with the focus falling on the CBI Industrial Trends survey released on Wednesday. It is widely expected to show a modest decline in orders last month but will keep consistent with the PMI survey, which has shown a recent pick-up in the UK manufacturing sector.
As I have mentioned, the Euro has come under increased pressure due to the ongoing conflict in the Middle East but it can also be argued that a host of negative Euro-zone data has shifted interest expectations over the coming months with the ECB concerned that a further tightening of interest rates will hamper economic growth. However, the Central Bank has given a strong indication that policy makers will lift rates to 3% on the 3rd August but we will be looking for direction on future policy during the accompanying press conference. The economic calendar in the Euro-zone is particularly light this week with German inflation data and the M3 money supply report taking centre stage. In addition, the Ifo business climate index is widely expected to remain near the 15-year high from last month, which indicates a strong pick-up in German GDP growth in the second quarter and therefore adding to the case for higher Euro-zone interest rates.
The Dollar came under renewed pressure last week following Ben Bernake’s first semi-annual testimony to the Senate Banking Committee where he stated that a gradual slowdown in U.S inflation could be expected, which has dampened speculation that the Federal Reserve will carry on raising interest rates in August. There is a plethora of significant data released in the States this week that should provide the market with some fresh direction ahead of the FOMC interest rate announcement next month. Firstly, GDP growth in the second quarter is widely expected to decelerate to 3.0% from 5.6% in the figures released on Friday. While elsewhere, the PCE deflator, which is the Fed’s preferred measure of inflation, may show a modest rise to 3.4%, which together with a predicted increase in the Employment Cost Index, point to the need for a further tightening of interest rates. In addition, the slowdown in the U.S housing market has been a direct result of the Fed’s aggressive policy towards raising interest rates and policymakers will be watching the data released this week for further evidence that sales continue to deteriorate following an unexpected rise in May.
The recent positive sentiment surrounding the Pound can be attributed to speculation that the Bank of England may finally be ready to shift monetary policy for the first time in almost a year. There was some significant data released in the UK yesterday that reaffirmed those suggestions with Retail Sales rising by twice as much as expected in June with sales increasing by 0.9% from May, which has prompted investors to raise their bets on a rise in rates over the coming months. Retail Sales accounts for two thirds of consumer spending, which has helped drive economic growth this year as the UK economy continues to expand into the third quarter while inflation also accelerates beyond the government’s comfort zone. Therefore, a further tightening of monetary policy seems inevitable and the Pound has been gaining on the news, firming 0.4% against the Dollar to close around 1.8500 last night. Sterling could make further gains this morning with the initial estimate for UK Gross Domestic Product in the second quarter and it is widely expected to show a quarterly increase of 0.7%, which would mean the annual growth rate has increased from 2.3% to 2.5%. Therefore, UK economic growth will maintain the fastest pace in two years going into the third quarter as a pick-up in consumer spending combined with sustained growth in the manufacturing and services sector signals the need for higher interest rates.
Without any significant data released in Europe or the States today, we expect the markets to be fairly quiet with attention switching to the ongoing conflict in the Middle East. The Euro has been under increased pressure since the fighting began in Lebanon but there has been some positive data released in the past 24hrs with Italian Consumer Confidence rising to a four month high in July while French consumer spending increased to a one-year high as both countries reached the final of the World Cup, which has evidently boosted sales.
The Dollar has been in retreat in the past 48hrs, particularly since Ben Bernanke addressed the Senate Banking Committee on monetary policy where it now seems likely that the Federal Reserve will hold interest rates around 5.50% following one more rise next month as economic growth begins to slow in the second half of the year. As a result, the Dollar declined against the majors and we saw further weakness yesterday despite the better than expected jobless report where initial claims over the last week dropped significantly to 304,000. In addition, an index of U.S leading economic indicators rose for the first time in three months in June as strong consumer confidence and a seemingly buoyant labour market will keep the economy on track. However, factory output in the Philadelphia region slowed dramatically in July with the Philly Fed Index dropping to 6.0 from 13.1 in June, which is lowest reading since January this year. Elsewhere, the minutes of the Federal Reserve’s June policy meeting were released last night and portrayed a level of uncertainty with regard the future tightening of interest rates but it seems the majority of policy makers believe that U.S inflation will gradually “edge down”.
Amid the continued turmoil in the Middle East, the U.S Dollar has made significant gains against the majors, firming to the highest levels against the Euro since mid April as speculation has intensified that the Federal Reserve will need to carry on raising interest rates in order to keep inflation in check. However, the Dollar’s two week rally came to a dramatic end yesterday, dropping over a point against the Pound to close around 1.8400 as the Fed chairman, Ben Bernanke, delivered his first semi-annual monetary policy report to the Senate Banking Committee. In his testimony, Bernanke focused on inflation and slowing economic growth saying, “moderation in growth would limit inflationary pressures over time”. The chairman also highlighted that long-term inflation pressure had slowed somewhat, largely as a result of seventeen consecutive interest rates rises over the past two years.
Therefore, it now looks increasingly likely that the Fed will hold interest rates in the coming months although investor’s are still factoring in a further hike in U.S rates in August. There was also some significant data released in the States yesterday with the Consumer Price Index showing an increase in prices for the sixth month running in June with costs excluding food and fuel rising by more than forecast. The Dollar may come under further pressure this afternoon as the weekly jobless report may show a further decline in the U.S labour market after recording 332,000 claims last week while elsewhere, the Philly Fed Index is expected to drop significantly in the figures for July.
The Pound has enjoyed a decent rally over the past two weeks and we saw further gains against the Dollar and the Euro yesterday despite the release of the minutes from the Bank of England’s last policy meeting. The MPC voted unanimously 7-0 in favour of keeping UK interest rates on hold at 4.50% but as a result of a string of positive economic data released in the past month, the Pound has been gaining on speculation that the BoE will need to lift rates at some point this year as core inflation accelerates to 2.5%. There is some significant data released this morning in the UK, which could push Sterling back above yesterday’s four week high against the Euro with Retail Sales widely expected to show an increase of 0.2% in June.
The Euro has declined significantly against Sterling and the Dollar in the past few weeks, primarily due to the continued unrest in the Middle East but it can also be argued that a string of negative data has shifted interest rate expectations in the Euro-zone over the coming months. The ECB are widely expected to lift rates to 3% next month but concerns are growing that a further tightening of monetary policy will result in slowing economic growth. However, there was some strong inflation data released in Germany yesterday with the Producer Price Index accelerating by more than anticipated in June as the cost of energy and raw materials increased. Data Released 20th July
UK 09:30 Retail Sales (June)
U.S 13:30 Initial Jobless Claims (w/e 15th July) U.S 15:00 Leading Indicators (June) U.S 17:00 Philly Fed Index (July) U.S 19:00 FOMC Minutes 28/29 June Meeting
There was a host of significant data released both in Europe and the U.S yesterday as the Pound looked to make further gains against the majors, firming 0.4% against the Dollar and up 0.6% versus the Euro. The positive sentiment surrounding Sterling increased following the release of the June Consumer Price Index, which showed that UK inflation is continuing to accelerate amid rising energy costs and therefore higher utility bills. The index rose by much more than expected at 0.3% month-on-month from May, pushing annual inflation towards a nine-month high at 2.5%, which is way ahead of the government’s target as speculation builds that the Bank of England will need to lift interest rates in the fourth quarter. Elsewhere, the RICS House Price Balance showed that prices in the UK continue to show signs of growth by rising to the highest level in almost two years. Without any economic data released in the UK this morning, the focus will be on the minutes of the BoE’s last policy meeting where it is widely expected that the MPC voted unanimously to keep interest rates on hold at 4.50%.
The Euro came under further pressure yesterday amid the release of the ZEW survey for German investor confidence, which fell by more than expected in July and to the lowest level in over a year despite the staging of the World Cup in the region. The report may spur concerns that higher interest rates are beginning to weigh heavily on economic growth. It is widely anticipated that the Central Bank will raise borrowing costs again on August 3rd to take their benchmark interest rate up to 3% but this report may damage the prospect of a further change in monetary policy going into the third quarter. The Euro declined significantly against the Pound, closing above 1.4600 last night and we are approaching a three-month low against the Dollar as speculation intensifies that the ECB will continue to adopt a more cautious approach to monetary tightening. There is a sparse supply of euro-zone data released for the rest of this week but the German Producer Price Index, out this morning, should provide an indication of inflation in Europe’s largest economy with forecasters anticipating that prices increased by 0.2% in June.
The Dollar’s recent rally showed no signs of slowing yesterday amid the release of some positive U.S data. Firstly, the Producer Price Index rose by more than expected in June as prices paid for food and energy grew by 0.5% on the month following a 0.2% increase in May, which will heighten concerns that U.S inflation may accelerate further despite the Federal Reserve lifting interest rates for seventeen consecutive months. Therefore, investors have increased the possibility of a rise in U.S interest rates in August and we will be watching the Consumer Price Index this afternoon with forecasters anticipating that the year-on-year growth rate jumped from 2.4% to 2.6%, while prices may have increased by upto 0.3% on the month. In addition, the chairman of the Federal Reserve, Ben Bernanke, takes centre stage this afternoon as he gives his semi-annual monetary policy report to the Senate Banking Committee. With escalating geopolitical issues in the Middle East, record oil prices and mounting inflationary pressures, Bernanke will need to reassure investors that the Fed can control inflation and moderate growth without pushing the U.S economy into recession.
Data Released 19th July
GER 07:00 Producer Price Index (June)
UK 09:30 BoE Minutes 5/6 July Meeting
U.S 13:30 Housing Starts (June) U.S 13:30 Consumer Price Index (June) U.S 13:30 Real Earnings (June)
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