The Dollar made significant gains against the Pound yesterday in the build-up to the FOMC rate announcement tomorrow despite a host of negative economic data that effectively should of hampered any lingering dollar sentiment. Firstly, the U.S current account deficit widened by more than anticipated in the second quarter with the shortfall coming in at $218.4 Billion following a revised estimate of $213.2 Billion in the first three months of the year. The growing deficit poses a significant risk to economic stability as the gap in trade amounts to roughly 6.6% of gross domestic product. However, given the unexpected shortfall in the current account, the dollar held firm against the Pound, closing just under 1.8800 last night. In addition, a report from the Treasury showed that net capital inflows collapsed in July as foreign investor’s slowed purchases of U.S securities in the face of falling demand. Net holdings increased $32.9 Billion against expectations of a more modest fall towards $70 Billion from June and investments were therefore insufficient to cover July’s $68 Billion trade deficit. It looks increasingly likely that the Federal Reserve will hold U.S interest rates at 5.25% in the evening announcement tomorrow but there is some significant inflation data released this afternoon in the States, which may raise expectations of a further hike in rates this year. Producer price inflation is widely expected to follow the consumer price index in August with prices, excluding food and energy, falling to an annual rate of 3.8% from 4.2% in July, which falls in line with a significant drop in oil prices over the last month. In addition, there is some significant housing data released today, which is expected to show that builders started work on 1.720 million new homes in August, the fifth decline in the last six months as higher interest rates discourage first time buyers.
There is a distinct lack of economic data released in the UK this week with the focus falling on the minutes from the Bank of England’s last policy meeting tomorrow as the market looks for further evidence of a rise in UK interest rates later this year. Speaking at the G7 meeting in Singapore, Gordon Brown said that economic growth in Britain was stronger and more balanced in 2006 with the international monetary fund raising their forecasts for UK growth to 2.7% from April’s estimate of 2.5%. With the government’s target at 2.0%, it looks increasingly likely that the Bank of England will need to raise UK interest rates in order to rein in rising inflation concerns.
The Euro made gains against Sterling yesterday despite a damaging report on Euro-zone industrial production, which unexpectedly declined 0.4% against expectations of 0.2% increase in July. However, over the last few weeks several members of the ECB’s governing council have publicly announced their concerns over rising inflationary pressures and yesterday Klaus Liebscher reiterated their comments ahead of the next rate decision in the first week of October. Although, the Euro has come under pressure this morning following a report on producer price inflation in Germany, which slowed for the third month in August and correlates with the sustained drop in oil prices from a record level this year. Core prices fell to an annual rate of 5.9% in August from 6.0% the previous month, signalling that inflationary pressures may be moderating in Europe’s largest economy. In addition, the Euro may decline further later this morning on the release of the ZEW survey for economic sentiment in Germany, which is widely expected to decline further in August after recording the lowest reading since 2001 in July.
Data Released 19th September
GER 10:00 ZEW Expectations Balance (September)
U.S 13:30 Producer Price Index (August)
- Ex Food & Energy
U.S 13:30 Housing Starts (August)
written by Adam Solomon
Related posts:
- The Dollar may come under further pressure ahead of the Current Account deficit, which is expected to widen further in the second quarter
- Sterling struggles against the majors as the U.K Current Account deficit widens to a record level
- The Pound makes further losses against the majors as the UK Trade Deficit unexpectedly widens in July
- Ahead of the ECB interest rate announcement and press conference, Euro buyers would be well advised to take advantage of the current rate above 1.4800
- The Pound remains largely unchanged despite UK unemployment falling for the second consecutive month in August
