The Dollar fell modestly against the Pound yesterday but stood firm versus the Euro despite a report on U.S consumer sentiment, which showed that confidence had dropped by the most in two years this month. The Conference Board’s index fell to a reading of 105.0 from 111.9 the previous month and although the report matched initial forecasts, the Dollar dropped amid speculation that spending growth may stall after a housing-induced credit market slump. Although the report fell largely in line with expectations, the New-York based confidence index is the first indicator to reflect the increase in the cost of borrowing this month and underlines the Fed’s concerns that risks to economic growth have “risen appreciably”. Despite the latest spate of economic reports, the Dollar’s decline was short-lived as the uncertainty surrounding financial markets continues with the Dow Jones falling 280 points over the course of the day. In addition, the minutes from the Federal Reserve’s last policy meeting exacerbated the liquidation of U.S stocks. The tone and language used in the report did not contain any surprises as the last meeting was held before the emergency conference call on the 17th August where the Fed cut the discount lending rate in order to bring stability to the market.
The Pound traded marginally higher against the Dollar yesterday and also rose steadily versus the Euro despite a particularly negative report from the British Bankers Association, which showed that UK lenders approved fewer mortgages in July. The report yesterday provides the latest indication that five interest rate increases in a year is starting to cool the UK housing market after a separate report showed that house prices were unchanged in August, the worst performance since November 2005. The Bank of England elected to keep rates unchanged at 5.75% this month, the highest level in six years, and stated that the property market is showing signs of “softening” amid moderating inflationary pressures and deteriorating consumer sentiment.
Amid the renewed uncertainty surrounding financial markets, the Euro was pushed lower against the Dollar by the close of trading last night as the appetite for risk aversion increased and traders returned to the relative “safe haven” currencies. In addition, the single currency fell for a second consecutive day as German business confidence declined to the lowest level in 10-months after the turmoil in the credit market clouded the outlook for European economic expansion. The Ifo sentiment index declined to a reading of 105.8 from 106.4 in July, which was slightly better than expected amid reports that German investor confidence had fallen to an eight month low over the same period. Concerns over the U.S subprime mortgage crisis has pushed up the cost of credit and made borrowing more difficult for companies while a separate report this morning has showed that German consumer confidence declined for the time in six months.
Following on from last week, the Dollar fell marginally lower against the Pound by the close of trading on Friday but rose 0.1% versus the Euro following a particularly positive report on U.S durable goods orders. American companies increased corporate spending in July as orders climbed 5.9%, which was significantly more than initial forecasts and the biggest month-on-month increase since September. Elsewhere, a separate report showed that there are signs of stability returning to the U.S housing market before this month’s subprime mortgage crisis. The sales of new homes unexpectedly rose 2.8% in July to an annual pace of 870,000 amid speculation that home sales are likely to show renewed weakness as the turmoil in credit markets pushes many mortgage lenders into administration. As the turmoil surrounding financial markets began to subside and some stability returned to trading, the Dollar came under renewed pressure versus the Pound and closed back above the $2.00 level last week. In terms of economic data, the U.S currency may continue to struggle this afternoon amid the release of consumer confidence data, which is expected to show that sentiment fell from a reading of 112.0 in July to 105.0 in August.
The Euro remained largely unchanged against the Pound last week but was down marginally versus the Dollar as growth in European manufacturing and service industries unexpectedly slowed in August. The preliminary estimate of the EC sentiment index seemed to suggest that the pace of orders had slowed this month while the turmoil in global credit markets may be starting to weigh on the European economy. Manufacturing orders increased at the slowed pace since November 2005 as the Euro’s dramatic appreciation against the Dollar cooled demand from overseas while economic growth in the Euro-region had slowed more than forecast in the second quarter. Nevertheless, the uncertainty surrounding bond and equity markets combined with slowing economic growth is unlikely to affect monetary policy as the ECB stood resilient in their plans to raise interest rates in September. However, the Euro came under increased pressure against the majors yesterday after the chairman of the Central Bank, Jean-Claude Trichet, appeared to revise his earlier stance and stated that the governing council was not “pre-committed” to raising interest rates next month.
The Pound bounced back strongly against the Dollar last week as appetite for risk aversion abated and investors looked to higher-yielding currencies amid a sense of stability returning to financial markets. In addition, the Pound found further support and rose briefly above 2.0100 versus the Dollar amid reports that the UK economy had accelerated in the second quarter. Gross domestic product increased 0.8% from the previous quarter, driven by increased consumer spending and business investment as the economy heads for the best period of growth in three years. The Pound rallied amid speculation that strong manufacturing data and faster economic growth will convince the Bank of England to raise UK interest rates to 6.0% by the end of the year.
The Pound rose for a second consecutive session against the Dollar yesterday, rising back above 1.9900 after posting the biggest weekly loss in over 2-years versus the U.S currency. The renewed appetite for the Pound coincided with a sense of stability returning to financial markets and increased speculation that the Bank of England will raise UK interest rates again while the U.S Federal Reserve will look forward to a cut. As global stocks rebounded following last week’s sharp declines, investors were lured back to the high-yielding currencies, which also saw the Australian and New Zealand Dollars make widespread gains. In addition, a report from the Confederation of British Industry showed that factory orders had reached the highest level in 12-years this month and suggests that manufacturing and industrial production will help support UK economic growth. As a result, there has been widespread speculation that the BoE will raise the benchmark lending rate, which is already the highest of all the major economies, a further 25 basis points to a fresh five-year high of 6.0%.
The recovery in the U.S Stock market, carry trades and bond yields rekindled some optimism back into financial markets yesterday following the Federal Reserve’s surprise decision to lower the discount-lending rate. As a result, the Dollar came under renewed pressure against most of the major currencies as an air of confidence returned to the market and traders felt secure moving away from the relative “safe haven” currencies. In addition, a spate of negative U.S economic reports, which have been largely discounted of late, also weighed on Dollar sentiment with a gauge of consumer confidence and mortgage applications falling sharply.
The Euro also made strong gains versus the Dollar yesterday while remaining largely unchanged against Sterling following a surprisingly positive report on Euro-zone industrial orders. Despite the Euro’s dramatic appreciation against the Dollar this year, orders increased 4.4% in June, the largest increase in nearly two years while a separate report showed that the current account balance had also jumped back into positive territory. The positive sentiment surrounding the Euro was also improved after European government bonds declined for a second consecutive day after the ECB signalled that the turmoil in credit markets won’t deter the governing council from raising interest rates in September.
Initially, the Pound found some support against the majors yesterday, remaining largely unchanged versus the Euro and rising 0.2% versus the U.S Dollar amid reports that growth in UK money supply had came in higher than anticipated. The report sparked some suggestion that the Bank of England may have more work to do in order to contain inflation in the medium-to-longer term. However, the Pound has declined against both the Euro and the Dollar this morning on concerns that the credit crisis is spreading to the UK. The recent uncertainty surrounding financial markets has seen economic news remain largely insignificant but once some stability is achieved and the volatility subsides, the economic data will determine whether UK interest rates will rise again this year. Elsewhere, the Pound seemed largely unaffected following a report from Rightmove plc, which showed that house prices in London fell for the first time in a year this month. The average price for a home in the capital dipped 0.1% from July, the first drop since August last year, and suggests that higher interest rates are beginning to cool the UK housing boom.
By the close of trading last night, the Dollar had failed to make any significant gains against the majors following the Federal Reserve’s surprise decision to lower its discount lending rate, putting the brakes on the unwinding of carry trades. As the appetite for risk aversion seemingly subsided so did the positive sentiment surrounding the Dollar but with the uncertainty in financial markets still causing concerns, the U.S currency may continue to make gains in the short-term.
The Euro remained largely unchanged against the Dollar last night but had fallen 0.2% versus the Pound amid a sparse supply of economic data as the focus this morning switches to the ZEW survey for investor confidence. The report is expected to highlight that confidence in Europe’s largest economy fell to the lowest level in seven months in August after equity and bond markets tumbled. Concerns that companies will find it difficult to borrow money after the U.S subprime mortgage crisis has seen German economic growth slow in the second quarter as demand for European made goods faded. However, the European Central Bank and other central banks around the world have acted to stem to the turmoil surrounding financial markets and have injected more that $350 billion of emergency funds in order to avert a liquidity crisis. Therefore, the Euro may remain largely unaffected in the aftermath of the report as the ECB president, Jean-Claude Trichet, calls on investors to keep their composure and has pledged to help consolidate a “smooth return to a normal assessment of risks in liquid markets.”
Following on from last week, the Pound suffered its biggest weekly fall in over two years against the Dollar, plummeting through the $2.00 barrier to trade as low as 1.9750 amid increased appetite for risk aversion that continues to weigh on the higher-yielding currencies. In addition, the downward momentum surrounding the Pound continued following the release of the minutes from the Bank of England’s last policy meeting, which showed that the monetary policy committee had voted unanimously to hold UK interest rates this month. The language used in the report seemed to strike a dovish tone from the nine-strong committee as the Central Bank stated that they had “no firm view on whether rates would need to rise further”. Elsewhere, the latest round of consumer price data showed that inflation had moderated to 1.9% year-on-year last month and recorded the biggest monthly fall in five years. The UK rate of inflation had settled under the Bank of England’s 2.0% target for the first time since March 2006 and suggests that the Central Bank won’t need to raise interest rates beyond 5.75%. The Pound looks set to remain vulnerable against the Dollar this week and may continue to decline as a report from Rightmove plc showed that London house prices fell for the first time in a year.
The Euro remained largely unchanged against the Pound and the Dollar on Friday as some stability returned to European money markets following the ECB’s decision to inject an unprecedented amount of funds on Tuesday to prevent a liquidity crisis. Initially, the single currency declined heavily against the Dollar amid suggestions that the ECB will refrain from raising interest rates next month as stock markets tumble and concerns deepen that the credit crunch sparked by the U.S subprime mortgage crisis will cub economic expansion. In terms of economic data, the focus this week will on the German ZEW index of investor sentiment, which is expected to show that the headline measure fell again in August. However, the index has recently proved itself to be poorly correlated with surveys based on real activity and investors are likely to pay more attention to the Purchasing Managers’ index of European manufacturing and service sector growth.
The positive momentum surrounding the Dollar gathered pace last week as the U.S currency dropped under the $2.00 level versus the Pound for the first time in six weeks amid the turmoil in financial markets, which led investors back towards relative “safe haven” currencies including the Dollar and the Yen. By the close of trading on Friday, the Dollar had relinquished some gains against Sterling and had also fell versus the Euro amid reports that the U.S Federal Reserve had cut the prime discount rate to 5.75% from 6.25% in response to deteriorating market conditions. As a result, the Euro found some support and U.S stocks rallied sharply, although selling pressures could resume if markets fail to stabilize this week. Amid the increased uncertainty in equity and bond markets, the host of U.S economic data was largely ignored as a gauge of U.S consumer sentiment showed that confidence in the economy had dropped to the lowest level in a year this month.
The decline of the Pound continued to gather momentum yesterday as the UK currency is poised for its biggest weekly fall in over two years against the Dollar as the liquidation of high-yielding currencies has sent the Pound plummeting alongside the Australian and New Zealand Dollars. Despite a stronger-than-expected report on UK retail sales in July, the Pound failed to find any support against the U.S currency as the appetite for risk aversion increased amid the fallout from widening credit losses tied to U.S subprime loans. In addition, the dovish tone of the minutes from the Bank of England’s August meeting has prompted speculation that UK interest rates may have peaked at 5.75%. Falling rate-hike expectations combined with the unwinding of so-called carry trades is likely to hamper Sterling over the coming weeks, particularly as the selling of high-yielding currencies continues.
The Euro remained largely unchanged against the Dollar yesterday, snapping a three day losing streak while the single currency managed to make some gains versus the Pound as the turmoil surrounding financial markets won’t have a bearing on the ECB’s monetary outlook. Following a particularly hawkish rhetoric from the chairman of the Central Bank, Jean-Claude Trichet, earlier this month, the governing council are expected to lift interest rates by a further 25 basis points to 4.25% in September. However, the ECB have injected an unprecedented amount of liquidity into European money markets over the past week as stock markets tumble and concerns deepen that a credit crunch sparked by the U.S subprime mortgage crisis will curb company earnings and slow economic growth.
The renewed strength of the U.S Dollar continued to gather momentum yesterday amid increased volatility in the financial markets, which saw the Dow plummet 340 points before consolidating at the close of trading last night. The sharp fall in credit and equity markets combined with the fundamental lack of liquidity at present has forced many investors to liquidate positions. As a result, the uncertainty surrounding the market increases appetite for risk aversion, which has sent the U.S Dollar higher against every major currency excluding the Japanese Yen. However, the sharp increase in volatility has prompted further speculation that the reversal of earlier losses in the stock market will influence the Federal Reserve to eventually cut U.S interest rates. Although the Fed have yet to publicly announce the concerns surround market volatility, investors are currently pricing in a 75% chance of a rate cut by the end of the year. Elsewhere, the Dollar remained resilient despite news that U.S housing starts had a hit a 10-year low in July while manufacturing output in the Philadelphia region fell below initial forecasts.
The Pound dropped to the lowest level in two months versus the U.S Dollar yesterday following the release of the minutes from the Bank of England’s last policy meeting where it was revealed that the MPC voted unanimously to hold interest rates at 5.75% this month. The monetary policy committee, including the governor of the Bank of England, Mervyn King, voted 9-0 in favour of keeping rates unchanged following a decision to raise in July. In the accompanying statement, policy makers emphasised that the committee “had no firm view on whether rates would need to rise further” and will take the time to assess the impact of five increases in the past year on curbing inflation. The tone and language used in the statement seemed to suggest that the Central Bank will adopt a neutral stance over the coming months and added that the “future path of the Bank rate would depend on the evidence in the months ahead.” Therefore, following the unexpected drop in inflation last month, which fell below the government’s 2.0% target, the chances of a further interest rate rise have been severely compromised.
Despite the surprisingly dovish tone from the Bank of England yesterday, the Euro traded marginally lower against the UK currency by the close of trading last night while also falling a further 0.5% versus the U.S Dollar. Nevertheless, the Euro received a much needed boost this morning following reports in Germany that the rate of inflation in Europe’s largest economy had held above the ECB’s 2.0% threshold for a fifth straight month in July. Consumer prices increased 0.5% from the previous month while the harmonized rate of inflation remained largely unchanged at 2.0%, which is expected to prompt the European Central Bank into raising interest rates in September. The recent turmoil surrounding financial markets has seen the ECB release an unprecedented amount of liquidity into European money markets and that generated some speculation that the Central Bank would keep rates unchanged next month.
The Dollar continued to make robust gains against the majors yesterday, firming an additional 0.9% versus the Pound despite a mixed bag of economic data, which seemed to suggest that the Federal Reserve may need to begin cutting interest rates. However, the Dollar found support after William Poole, the President of the St Louis Federal Reserve Bank, said that the U.S subprime mortgage crisis won’t threaten the pace of economic growth while only a “calamity” would justify a cut in borrowing costs. U.S consumer prices rose just 0.1% in July, which represents the smallest monthly gain since January and provides an indication that inflationary pressures are moderating faster than Fed policy makers anticipated. The worst slump in housing since 1990 combined with record fuel prices have weighed heavily on consumer spending in the second quarter and that has forced retailers to lower prices in order to attract business. Elsewhere, a separate report on U.S industrial production showed that output had risen 0.3% last month as a weaker Dollar increased foreign demand for U.S based products.
The Pound came under intense pressure yesterday, dropping 0.4% versus the Euro and falling a further 1.3% against the U.S Dollar to trade well under the $2.00 level for the first time in six weeks. The Pound has been weakening against most of the lower yielding currencies as investors continue to unwind carry trades in the face of the turmoil surrounding equity and bond markets. However, the Pound fell considerably against the Dollar yesterday following reports that UK inflation unexpectedly dropped by the most in five years in July and settled below the Bank of England’s 2.0% target for the first time since March 2006. Consumer prices rose just 1.9% year-on-year last month despite initial forecasts of a more modest drop towards 2.3% as higher interest rates begin to slow the economy. The unprecedented drop in inflationary pressures has ended a 14-month period when inflation exceeded the 2.0% goal and reached the highest level in a decade in March at 3.1%. Only last week the Bank of England retained a tightening bias and highlighted that upside risks to price stability remained a concern to policy makers. The report yesterday has severely questioned whether the monetary policy committee will need to raise interest rates again amid the release of the minutes from the last meeting this morning.
The Euro made strong gains against the Pound yesterday but fell a further 0.2% versus the resurgent U.S Dollar to trade at lowest level in a month following reports that European economic growth had slowed by more than initial expectations. The economy, made up of the 13 nations that share the Euro, expanded at just 0.3% in the second quarter as the apparent rebound in consumer spending failed to supplement the weakness in manufacturing and construction. The pace of growth in the slowest since the fourth quarter of 2004 and provides an indication that the expansion in the economy has reached a plateau following the Euro’s dramatic appreciation against the Dollar this year. The single currency has gained 7% versus it’s U.S counterpart and that has weighed heavily on European export growth while higher oil prices increased costs for companies and consumers.
The recent positive momentum surrounding the Dollar continued yesterday as the U.S currency made robust gains against the majors, particularly the Pound as we closed under the $2.00 level for the first time since May. The Dollar managed to shrug off reports that U.S producer-price inflation had risen by less than expectations in July while a surge in exports had unexpectedly narrowed the U.S trade deficit. Producer prices rose just 0.1% from a year earlier, which represents the smallest gains in three months as the report reinforces the sense that U.S inflation has been moderating of late. Elsewhere, the shortfall in trade exceeded expectations and may continue to narrow over the coming months as oil prices retreat and a weaker Dollar helps spur demand for U.S based exports. In terms of economic data, the U.S currency may come under some pressure as a broader measure of inflation may show that consumer prices rose as the slowest pace in eight months in July.
Data Released 15th August
UK 09:30 BoE MPC Minutes of the 1st -2nd August Meeting
UK 09:30 Claimant Count Unemployment (July)
UK 09:30 Average Hourly Earnings (3 months to June)
The Pound dropped to a five-week low against the Dollar yesterday and loss ground against the Japanese Yen as concerns over the stability of financial markets continues to weigh heavily on high-yielding currencies. The turmoil in the U.S subprime mortgage market has spread to equity and bond markets and has seen investors unwind so called carry trades where low yielding currencies such as the Yen are sold to fund the purchase of riskier, high-yielding assets elsewhere. Nevertheless, the Pound remained firm against the Euro as a report from the DCLG showed that UK house prices were 12.1% higher in June than at this stage last year. The rate of growth was the highest since March 2005 and was up on May’s revised figure of 10.8%, showing that the housing market remains resilient despite significantly higher borrowing costs. However, Sterling sentiment was further hampered after a separate report showed an unexpected dip in UK producer price inflation, which saw the Pound fall 0.5% against the U.S Dollar by the close of trading last night. The negative sentiment surrounding the Pound may gather momentum this morning ahead of the release of the latest round of consumer price inflation. The CPI report is expected to show that the UK inflation rate fell to the lowest level in over a year in July with prices rising just 2.3% from a year earlier.
The Euro came under further pressure against the Dollar yesterday and also made losses versus the Pound after the European Central Bank injected yet more liquidity into the overnight money market for the third consecutive trading session. Despite the apparent lack of economic data released in the Euro-region, the single currency has been at the mercy of the events that have evolved over the past week with markets still wary of risk exposure. The ECB loaned a further €47.7 billion Euros to banks and institutions for the third straight day but declared that the stability in the European money markets are beginning to return to normal. In addition, comments from the IMF helped to stem any further losses for the Euro as a statement released said that “the re–assessment of credit risk that is taking place will be manageable. ” That sentiment is likely to shift the focus back towards the prospect of further monetary tightening in September where the ECB’s governing council are expected to lift interest rates by a further 25 basis points in order to curb looming inflationary pressures.
The renewed appetite for the Dollar continued to gather momentum yesterday as the U.S currency rose 0.6% against the Euro and reached a five-week high versus the Pound as U.S retail sales increased by more than forecast in July. The report provides a strong indication that consumer spending will rebound over the coming months as the recession in the housing market persists. Sales increased 0.3% following a revised 0.7% decline in June as the figures echo recent comments from the Fed, that the economy will grow at a “moderate” pace even with the increased risks in volatile financial markets, reduced credit and the slump in housing. However, the Dollar may come under some pressure this afternoon amid the release of the U.S trade balance, which is expected to show that the deficit in goods and services widened in June. The gap is projected to rise 1.7% to $61 billion as soaring oil prices pushed up imports and wholesale prices last month.
Following on from last week, the turmoil surrounding financial markets has continued to dominate and the Pound has resumed the downward momentum against the Dollar amid speculation that the so-called carry trades will continue to unwind. The concerns surrounding the U.S subprime mortgage and credit markets are spreading to the stock market, which has traded sharply lower over the past couple of sessions. The increase in volatility has prompted investment from high yielding currencies back into “safe haven” currencies including the U.S Dollar, which has risen 2.6% against the Pound over the past ten days alone. In addition, there is a host of key economic data released in the UK this week that could potentially sway monetary policy with the minutes from the BoE’s last policy meeting taking centre stage. Following the release of the Central Bank’s quarterly inflation report last week, policy makers may retain a tightening bias after confirming that interest rates are likely to rise to 6.0% by the turn of the year. Elsewhere, the latest round of inflation data will prove pivotal as UK consumer prices are expected to fall to the lowest level in over a year in July as five interest rate increases in under a year begin to slow the economy.
The Euro plummeted against the Dollar last week and also made further losses versus the Pound amid news that the European Central Bank would provide unlimited funds below the 4.0% base rate to avoid a liquidity crisis. As a result, treasuries rose and European money markets surged and that trend looks set to continue in the short-term as the ECB injects a further €47 billion into the market for a third consecutive trading day. Investors are demanding compensation in the form of higher yields after further losses in bonds backed by subprime mortgages continues to spread to other markets and threatens to curtail lending. In terms of economic data, the Euro may find some support against the majors this week amid the release of the flash estimates for Euro-zone GDP in the second quarter. The report is expected to show that growth slowed modestly to 0.6% although the year-on-year rate is still above trend at 2.7% and therefore supports the case for higher interest rates.
The renewed appetite for the Dollar looks set to gather momentum this week amid a packed schedule of U.S economic data while the continued uncertainty surrounding the financial markets is attracting investors back to the U.S currency. Following comments from the Federal Reserve last week that inflation remains the overriding concern to policy makers, the latest round of CPI data is expected to remain above 2.0% and keep the Fed from cutting rates this year. Meanwhile, the Dollar may also find some support this afternoon amid the release of the latest round of retail data, which is expected to show that sales in the U.S rose in July. The report may illustrate that consumer spending is moderating slightly while the housing recession persists as sales rise 0.2% following a 0.9% collapse in June.
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