Following on from the last week, the Pound made significant gains against the Euro and the Dollar as speculation intensifies that the Bank of England will need to raise UK interest rates for the first time in eleven months to cope with the threat of rising inflation. A strong pick-up in retail sales and the Consumer Price Index pushed Sterling towards 1.8500 versus the Dollar at the close on Friday while the Euro is still being hampered by the ongoing conflict in the Middle East as we ended the week at 1.4650. In addition, UK economic growth accelerated at the fastest in pace two years in the second quarter, which provides further evidence that the BoE will have to lift interest rates from the current 4.50% and forecasters are anticipating that the MPC could shift rates as early as next month. There is a sparse supply of significant data released in the UK this week with the focus falling on the CBI Industrial Trends survey released on Wednesday. It is widely expected to show a modest decline in orders last month but will keep consistent with the PMI survey, which has shown a recent pick-up in the UK manufacturing sector.
As I have mentioned, the Euro has come under increased pressure due to the ongoing conflict in the Middle East but it can also be argued that a host of negative Euro-zone data has shifted interest expectations over the coming months with the ECB concerned that a further tightening of interest rates will hamper economic growth. However, the Central Bank has given a strong indication that policy makers will lift rates to 3% on the 3rd August but we will be looking for direction on future policy during the accompanying press conference. The economic calendar in the Euro-zone is particularly light this week with German inflation data and the M3 money supply report taking centre stage. In addition, the Ifo business climate index is widely expected to remain near the 15-year high from last month, which indicates a strong pick-up in German GDP growth in the second quarter and therefore adding to the case for higher Euro-zone interest rates.
The Dollar came under renewed pressure last week following Ben Bernake’s first semi-annual testimony to the Senate Banking Committee where he stated that a gradual slowdown in U.S inflation could be expected, which has dampened speculation that the Federal Reserve will carry on raising interest rates in August. There is a plethora of significant data released in the States this week that should provide the market with some fresh direction ahead of the FOMC interest rate announcement next month. Firstly, GDP growth in the second quarter is widely expected to decelerate to 3.0% from 5.6% in the figures released on Friday. While elsewhere, the PCE deflator, which is the Fed’s preferred measure of inflation, may show a modest rise to 3.4%, which together with a predicted increase in the Employment Cost Index, point to the need for a further tightening of interest rates. In addition, the slowdown in the U.S housing market has been a direct result of the Fed’s aggressive policy towards raising interest rates and policymakers will be watching the data released this week for further evidence that sales continue to deteriorate following an unexpected rise in May.
Data Released 24th July
UK 11:00 CBI Distributive Trades Balance
EU 10:00 Industrial Orders (May)
written by Adam Solomon
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