Market Report

The U.K. pound is set to gain this week as signs of growth in Europe's second-largest economy, is quickening. This, in conjunction with the sustained up tick in inflation has increased the prospect that the Bank of England will raise its interest rates for a second time this year and the market is beginning to position for it.

The pound rose to a week-high as reports showed inflation quickened in August and property prices rose, and after the International Monetary Fund yesterday lifted its forecast for U.K. growth this year.

Overall currency sentiment continues to be driven by the USD at the moment however and despite stronger than expected retail sales data yesterday negative sentiment remains. This afternoon could provide the market with further confirmation of a top in US interest rates if consumer inflation data comes in benign as expected.

The events of this weekend will be very significant not only in terms of the Premiership 'big guns' battling it out, but the G7 finance ministers meet to discuss the state of the global economy and the rhetoric emanating from the meeting in Singapore will be the main driver of currencies for the early part of next week.

Have a good weekend.

VC

Yesterday saw little in the way of economic data, but we saw GBP strengthen against both the Euro and US Dollar as sentiment has turned positive for GBP in the light of growth prospects and the inflation outlook. With this in mind today's Retail Sales figure from the UK at 9:30, which is likely to come out at 0.3%, compared to -0.3% last month will play an important role in compounding or detracting from the current sentiment.

Today also sees the Retail Sales and Jobless numbers from the US at 13:30, which is likely to reiterate the thought that the US economy is slowing. The US has been caught between some positive earnings reports from corporate US and some weak data from the consumer and housing markets. Weight of short USD positions will slow any USD decline but the downside remains the weak side.

The IMF has raised its global growth forecast yet continues to warn against the risks of higher oil prices and the US housing market slowdown threatening the strongest global expansion in three decades. The IMF also suggested that the US may need to raise rates again to temper inflation.

GBPEUR has been pushed higher as a result of EURUSD lack of progress and in my opinion has pushed GBPEUR out of line, giving an opportunity to sell GBP at great levels.

Good luck to the English teams in the UEFA cup tonight.

NS

The United States trade deficit unexpectedly surged to a record $68 billion in July, and a survey in which half the American public think the economy is troubled, led to the Dollar losing some of its recent gains. There are no data releases of interest from the United States today; however the negative USD sentiment is likely to continue in the short term.

Sterling ended a five-day losing run against the dollar yesterday after a government report showed U.K. inflation unexpectedly accelerated last month to match the highest level in nine years. The U.K. currency has risen more than 5 percent this year on expectations the BOE will raise borrowing costs again, after a surprise rate increase in August. Whilst overall we remain negative on GBP there is likely to be more two way price action as USD sentiment and interest rate hike talk continues.

Japan clarified its rate path ambiguity earlier this morning as it suggested interest rates will rise sooner than anticipated by the market. This is likely to buoy the JPY in the short term.

The Czech Koruna fell for a sixth day, the longest slide since Feb '04 after Czech Central bank vice Governor said that the country may not qualify for adopting the Euro in 2010. This may have a weakening effect on Euro-zone periphery countries in the short term.

VC

Yesterdays PPI report showed that producer inflation was decelerating. This did not impact GBP/EUR yesterday, as we wait to see how inflation has fed through to the consumer from the CPI data later today. This is expected to show a slight increase compared to last months data. If it is higher than expected, we will see GBP higher as this will leave the door open for further rate rises by year end.

The USD will trade heavy into the figures but any reduction in the deficit will see an extension of the recent gains. GBP and EUR will take a back seat today as all market eyes will be focused on the USD.

The US trade balance this afternoon is expected to show a figure of 65.5 billion, which should be looked out for today (13:30). This is an ongoing banana skin for the US and for the USD, though at the moment the US's ability to finance the exodus of USD to purchase goods and services from abroad, through inward investment into equities and bonds, is stable. The recent IMF financial stability report states that "risks have increased potential for disorderly unwinding of global economic imbalances." That said this has been a market concern since the trade balance hit $25bn a month around 5 years ago. It will be an issue for the USD at some point but at the moment positioning is too polarized to allow a 'disorderly unwind'.

NS

After last weeks GBP slide that we have been pointing to for a couple of weeks here in our commentaries, there is a resumption of data to help guide currencies this week. On that basis and considering the depth of last weeks move it is more likely to be a week in which we move in both directions. While we still advocate selling GBP against both USD and EUR, look for opportunities to sell on any bounce.

Today sees the release of UK PPI, which will be closely watched for signs of inflation at the factory gate, and the visible trade balance. UK data is going to be closely scrutinised from here as market commentators look for data to confirm or deny the possibility of a further UK rate hike this year.

Significant in terms of overall market sentiment is the rhetoric that from three Fed governors today and the potential implications for growth and interest rate outlooks in the US. Overnight has seen the release of Japanese machinery orders showing the biggest slump in 20 years. This highlights the continued fragility of the Japanese recovery and keeps the USD 'upper hand' in Asia.

NS

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