The Federal Reserve raise U.S interest rates to 5.25% and it looks increasingly likely that further tightening of monetary policy is on the agenda

By on June 29th, 2006.
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For the first time this week, there was a glut of significant data released on both sides of the Atlantic yesterday with the Pound coming under further pressure, particularly against the Dollar, despite the release of the Nationwide house price index, which showed that prices only rose by 0.3% in June with the year-on-year growth rate accelerating 5% in the past month. In addition, a report from the Bank of England showed that UK mortgage approvals actually rose considerably in May, coming in at 117,000, which was well above expectations and well in excess of 106,000 in April. However, with the Federal Reserve raising their benchmark interest rate for the seventeenth month in succession, the Pound has been under continued pressure in the last week but some relief may be in sight this morning with UK consumer confidence set to show a marginal improvement in the last month, primarily due to increased sales of England football shirts and high-definition televisions in preparation for the World Cup. Elsewhere, UK Gross Domestic Product is expected to remain relatively unchanged with the annual growth rate at 2.2%, slightly ahead of the government’s target.

The Euro has been heavily boosted this week after a string of positive economic data has led to fresh calls for the ECB to be more aggressive with regard monetary tightening and lift interest rates again before the next scheduled rise in August, with several members of the governing council publicly announcing their recommendation for higher rates. There was some significant data released in the Euro-zone yesterday with German unemployment falling for a third consecutive month in June and M3 money supply growth reached the highest level in 3 years for the 12 countries supporting the Euro, which strengthens the case for the central bank to continue lifting interest rates. The Euro has pushed under 1.4500 against the Pound and we may see further gains this morning with the EU Sentiment Index expected to remain high, particularly after business confidence in Germany reached the highest level in 15-years earlier this week.

The Dollar has been gaining in recent weeks in the build-up to the FOMC rate announcement where the Federal Reserve were widely expected to raise interest rates by another quarter-point to take them upto 5.25%. Last night, the Fed did indeed raise interest rates by 25 basis points but the language used in the accompanying statement differed from previous months. The FOMC declared that Productivity is holding unit labour costs in check but they remain vigiliant on inflation, saying that some inflation risks remain and that it has been elevated in recent months. Therefore, it looks increasingly likely that the Fed will lift rates once again in the coming months although the Dollar reacted surprisingly to the news, dropping back above 1.8200. There was some important inflationary data released yesterday in the States as Gross Domestic Product showed that the U.S economy expanded at a much faster rate than anticipated, rising to 5.6% in the first quarter, led by a surge in consumer spending that has since been muted by higher energy costs. Elsewhere, the weekly jobless figures were released and the number of claims made in the past week rose to 313,000. There is some hugely significant inflationary data released this afternoon with Personal Income and Expenditure, the Fed’s preferred measure of inflation, widely expected to show a modest drop of 0.3% in May.

Data Released 29th June

UK 09:30 Final GDP (Q1)
UK 09:30 Current Account Balance (Q1)
UK 10:30 Consumer Confidence (June)

EU 10:00 Flash Consumer Price Index (June)
EU 10:00 Sentiment Index (June)
- Business / Consumer Confidence

U.S 13:30 Personal Income / Expenditure (May)
- Core PCE
U.S 14:45 Final Michigan Sentiment (June)
U.S 15:00 Chicago PMI (June)

written by Adam Solomon

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