The Euro has been making gains against the Pound this week after we failed to break the resistance level at 1.4675. As we predicted, we have subsequently continued to trade down under 1.4600 and the Euro remained firm yesterday despite business confidence in Germany dropping by more than expected in July. The Ifo Index reported that confidence in Europe’s largest economy declined to 105.6 from the 15-year high in June as record oil prices and rising interest rates threatens to slow economic growth. Following the escalating conflict in the Middle East, the price of crude oil reached a record $78.40 a barrel and coupled with a further tightening of Euro-zone interest rates, it seems that business confidence may continue to slow in the second half of the year. However, the Euro was relatively unchanged on the release of the negative data and made further gains against the majors by the close last night, which gives us an indication that the Euro will continue to strengthen in the build-up to the ECB interest rate announcement next week. We have already seen further market movement this morning as German consumer confidence rose to the highest level in 5-years, thanks largely to the staging of the World Cup in the region, but primarily due to the increase in sales tax that will come into force next year as households became more willing to spend.
The Pound remained relatively unchanged during yesterday’s session despite the CBI Industrial Trends Survey improving by less than expected in July. UK Manufacturing has staged a decent recovery this year but the slight fall in orders this month is consistent with the PMI survey. Without any significant data released in the UK for the remainder of this week, the Pound may be open to attack but due to a host of positive economic data, it does seem increasingly likely that the Bank of England will lift interest rates at some point in the fourth quarter.
The Dollar has relinquished much of the positive sentiment that built up following the release of strong consumer confidence data and a better than expected report on the sales of existing homes earlier this week. It was widely expected that the Fed’s aggressive policy towards raising interest rates would have a devastating effect on the U.S housing market but over the past two months, the sales of new and previously owned homes has continued to post better than expected results. Therefore, the Dollar strengthened on speculation that the Fed may need to continue tightening interest rates beyond the current 5.25%. However, in the past 24hrs expectations have dramatically shifted away from an impending rate rise as the Fed’s Beige Book, which reports on economic conditions two weeks prior the monetary policy meetings, reported that consumer sentiment is slowing while inflationary pressures are at a ‘modest’ level. This will heighten speculation that the Fed will hold U.S interest rates for the first time in almost 18-months and as a result, the Dollar declined significantly against the majors, trading towards 1.8600 against the Pound and above 1.2750 versus the Euro.
Data Released 27th July
U.S 13:30 Durable Goods Orders (June)
U.S 13:30 Weekly Jobless Claims (w/e 22nd July)
U.S 13:30 New Home Sales (June)
written by Adam Solomon
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