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)
written by Adam Solomon
- the Dollar gains on speculation the Fed will raise interest rates after higher inflation and rising producer prices
- The Euro strengthens against the Pound after several members of the ECB’s governing council announce the need for higher euro-zone interest rates
- The Dollar’s seven day winning streak is shattered as the threat of higher interest rates may hamper economic growth
- Higher interest rates are beginning to wane on U.S consumer sentiment with housing starts expected to decline further in May
- The Dollar may strengthen further with key inflationary data both in Europe and the States expected to point to higher interest rates