Market Report

This morning has already seen the Dollar strengthening once again against Sterling this is due to a combination of factors: over confidence in further rate hikes in the UK born out of the 3rd August hike; weight of short USD positioning is beginning to frustrate speculators and the UK political and consumer woes that we have alluded to over the last couple of weeks in our editorials have begun to come to the fore (yesterday highlighted this further by the significant weakness in retail sales). The Philadelphia FED Survey yesterday showed an increase in business confidence which has also helped the strengthing of the Dollar.

GBP woes have also emanated against the EUR, we have seen a drop of around 1% over the last two days as Euro zone interest rates remain the least accommodative in comparison to inflationary pressures, boosting the attractiveness of the EUR to investors.

Hungary has also come under pressure against the EUR and USD and remains at its highs against GBP. Hungary has the biggest budget deficit as a percentage of GDP in the whole of the Euro zone, at 10% it is way above the 3% Maastricht criteria for Euro entry. Government measures to reduce this will include raising taxes and public sector employment which will harm economic prosperity in the short term. HUF is likely to stay weak.

VC

Good morning all, yesterdays Consumer Price Index figures from the United States proved to be the smallest increase since February, which seems to show an easing in inflation worries and hence a reduced likelihood of an increase in US interest rates anytime soon.

With the situation in the Middle East having eased somewhat, the price of crude oil has dropped and a combination of the two has left the Dollar a little vulnerable at present.

After the surprise interest rate hike earlier this month Sterling has performed well in the markets, but today saw the release of the Retail Sales figures from the U.K which were expected to rise by 0.2% and in fact showed a drop of 0.3% this was due in part to a fall off in sales after the World Cup and the July heat wave. These figures may indicate that there is less need for a rate hike in the U.K in the near future as inflation worries ease and may also start to put the seed of doubt into the continued above trend growth of the UK economy.

VC

Yesterday we had some important economic data released. The UK CPI came out almost as expected, hence keeping the possibility of a further rate rise alive, The same cant be said for the US PPI figures, which showed core prices falling 0.3% on the month, the first drop in nine months signifying that inflation may be under control, giving nervous investors hope that we have seen the last US interest rate hike for a while. The US Dollar weakened versus most of the major currencies after this news.

Today we see more influential data, the highlights of which are the US CPI figures and the minutes of the last Bank of England meeting. The US CPI is going to be very important in deciding the sentiment for the rest of the summer, particularly in the light of yesterdays dovish release. If we see a figure of 0.2% this will add fuel to the fire that the interest cycle has reached its peak. The Bank of England minutes is expected to show that the vote was 7-0 in favour of the interest rate hike, any dissenters will have a calming effect on UK rates, particularly in line with the US sentiment.

Any surprises in the data will see movements in the exchange rates.

It looks like it will be an interesting day.

DE

Yesterday saw GBP/USD fall in the morning as PPI data from the UK highlighted producers inability to pass on the energy induced input cost rises to the consumer, although the lack of momentum saw GBP return to the days opening levels. GBP/EUR stubbornly remained in the range that it has been in for the last week.

Today's focus is all on inflation. The UK CPI is released this morning, which is expected to be 2.4% compared to 2.5% in June. If we see a number lower than expected, we should see GBP come down a little versus both the USD and EUR. Later today however we have the US PPI figures released. This is unlikely to impact the USD as much as tomorrows US CPI figures, yet any signs of an uptick in inflation will be seen as a suggestion of a resumption in the US rate hiking cycle and will be USD positive. We do have Housing market data and Net foreign capital flow data which are likely to influence the USD in terms of the US rate cycle and ability to finance the huge trade deficit respectively.

Readers of this page may know that I am a cricket fan, in particular Essex. So well done Essex on another one day win last night!

DE

We begin trading this morning around the levels we saw at the end of last week with GBP/USD pressuring the lower end of the range.

Today sees the release of the PPI (Producer Price Index) from the UK, a focal point for the inflation watchers. The data highlighted the inability for Producers to pass on input price rises to the consumer and as such points out diminishing profit margins. However, later in the week we have the UK CPI (Consumer Price Index), labour market report and retail sales numbers which could have an effect on GBP/EUR. All will be keenly watched in the light of this mornings Q2 GDP growth figure out of Germany. The 0.9% number was the fastest pace of growth, in Europe's largest economy, in 5 years, pointing to further acceleration in the 12 nation Euro zone.

This should spur continued investment into the expanding Euro area and see price levels remaining buoyant above the 2% ECB target level, suggesting Euro zone rates achieve the 3.5% level by the end of the year.

On Wednesday we see the US CPI report, which if slightly higher than expected could put further downside pressure on GBP/USD after the better than expected retail sales figures on Friday.

Saturday sees the beginning of the PROPER football season (sorry to fans of teams outside the Premiership), so I thought I would give you my predictions for the season: Chelsea will be champions again, with Liverpool as their nearest rivals. Tottenham will finish above Arsenal with Fulham, Reading and Sheffield United being relegated.

Have a good week.

NS