Following on from last week, the Pound has been susceptible to the increased level of volatility in stock and commodity markets while the looming threat of a UK recession has caused some division with the Bank of England’s monetary policy committee.
The price of oil may have peaked above $147 a barrel as U.S inventories dramatically increased beyond initial forecasts in June but the subsequent impact on inflation will probably see consumer prices breach 4.0% over the coming month.
The rising threat of inflation is posing a problem for the BoE as policy makers are forced to weigh up the escalating risks to price stability against a slowdown in the UK economy.
The Pound rallied above $2.00 last week but failed to sustain that momentum as a 15% drop in oil prices helped boost Dollar sentiment while the focus should switch to UK fundamentals this week amid a packed calendar of market moving data.
The advanced estimate of gross domestic product in the second quarter is expected to show a further deterioration in UK economic growth. The report may show that the economy grew by just 0.2% in the three months to June while a separate report on retail sales is expected to confirm that consumer spending declined significantly in June, falling 2.5% after a surprising gain in May.
Nevertheless, the focus will inevitably fall on the release of the minutes from the Bank of England’s last policy meeting and although policy makers left rates unchanged, the voting pattern of the nine-member committee could lead to speculation of a rate change.
Despite suggestions that the Euro-zone economy contracted in the second quarter, the relentless threat of inflation continues to dominate the ECB’s monetary policy and that has continued to support the Euro as the single currency consolidates near the all time record high versus the Dollar.
A spate of recent negative economic reports has pointed to further downside risks to growth while manufacturers are struggling to cope with rising prices as business and consumer confidence dwindles while borrowing costs increase.
The ECB’s governing council members elected to lift interest rates by 25 basis points earlier this month in an attempt to rein inflation, which has remained at the highest level in 16-years and food and fuel prices rise to a record high.
The focus this week will fall on the IFO business sentiment index in Germany where confidence is expected to deteriorate in correlation with the ZEW survey of investor and analyst expectations released earlier this month.
A sharp drop in exports and production points to an overall slowdown in business activity but a separate government report is expected to show that producer price inflation in Europe’s largest economy increased at the fastest pace in 26-years last month.
The Dollar rebounded against most of the major currencies on Friday after falling to a fresh record low versus the Euro earlier in the week as the turmoil surrounding financial markets eased and crude oil retreated 15% in just 4-days.
The renewed appetite for the Dollar was also helped amid speculation that U.S investment banks will withstand the credit crisis while the Treasury Secretary, Henry Paulson, is confident that the government will pass proposals to shore up confidence in Fannie Mae and Freddie Mac.
Data Released 21st July
U.K 00:01 Rightmove House Prices (July)
U.S 15:00 Leading Indicators (June)
written by Adam Solomon
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