The week began with economic data in the form of RICS house price index, house prices in May rose to 22% while the previous release was revised up from 17% to 19% which gave the pound an early boost. The newly establish Office for Budget Responsibility (OBR) released its highly anticipated growth forecast report after comments from Bank of England member Andrew Sentance boosted the pound. Sentance commented that inflation in the UK had been resilient to pressures from unemployment and weakening consumer confidence and felt this highlighted the issue of how long expansionary policy would remain appropriate and caused speculation that interest rate in Britain may be raised in the second half of this year.  The OBR report cut growth forecasts but indicated that it expected an improvement in UK public finances. Growth projections for 2011 were reduced to 2.6% with a forecast of 2.7% in the medium term, this was in contrast to the previous governments projections of 3.25% next year and 3.5% for the 3 years after that. On the deficit the OBR stated that tax revenues from the VAT increase had flowed into the exchequer faster than expected and along with higher inflation had contributed to the lower deficit forecasts. Markets welcomed the report as it provided much needed clarity on the actual state of the UK economy and thus boosted market confidence. While gains were hesitant at first the pounds upward momentum was maintained for the remainder of the week by the increased optimism.

As expected in the current climate of global uncertainty the trend was not without its pitfalls. UK CPI data showed inflation dropping y/y in May, coming out at 3.4% versus the previous release of 3.7% in April. The lower inflation number placed a dampener on the prospect of an interest rate hike and raised concern that the positive impact of higher inflation on the UK deficit may  be short-lived. Risk aversion due to weaker US economic data created the largest move in favour of the dollar but better than expected UK employment data and retails sales number put the pound back on track.

The euro suffered a very volatile week mostly shifting ranges versus the pound as a combination of pound strength and changes in market sentiment kept euro trade locked down. US and Asian markets traded higher early on and confidence was boosted on the back of robust Chinese export data and the renewed commitment from the Chinese State Pension to holding euro based assets boosted risk appetite and allowed the euro to make gains. EU industrial production allowed the euro to further earlier gains versus the dollar after the data came out better than expected but risk aversion returned and the single currency struggled as another rating agency, Moody’s, has downgraded Greek bonds to junk. Sentiment towards the euro was not all negative though, successful government bond auctions by both Spain and Ireland boosted confidence and gave the euro a strong rebound across the board. Spain in particular has been plagued by debt concerns and uncertainty over the stability on their financial system. Spain added to the boost in confidence later in the week stating they would release the results of stress tests done on Spanish banks as a means to ease market pressure on Spain and the single currency. Economic data from the euro-zone was largely overshadowed by sentiment driven trade, EU CPI data came out in line with expectation while German ZEW economic sentiment dropped sharply in June to 28.7 from 45.8 the previous month.

The European Central Bank released its monthly report which showed that the ECB felt price pressures would remain anchored and largely in line with the banks targets. GDP growth forecast remained positive despite recent debt concerns in Spain while growth for 2010 was expected to continue to improve as global markets recover although forecasts for 2011 were slightly lower.

The dollar remained weak across the board for most of the week as confidence returned and safe haven demand for the greenback eased. US data in the early part of the week fuelled the improvement in market confidences as TICS capital flows data showed the States has more than sufficient inflows of cash to fund their trade deficit. PPI inflation and industrial production figures all came out better than expected keeping the market mood positive. The second batch of US data had the opposite effect though as weaker figures supported risk aversion and pushed the dollar higher. The economic data raised concerns that the US recovery was losing steam as CPI inflation, the US current account and weekly jobless claims all came out lower.

Next Week

There is no significant UK data releases scheduled for this week but that does not mean that the pound will be solely at the mercy of sentiment and wider market movements. The Bank of England will release the minutes from the last MPC meeting, where the central bank kept interest rates on hold at 0.5% and made no changes to the £200bln asset purchase scheme. Added significance for the minutes comes as markets will assess the BoE’s economic assessment against that of last week’s report from the Office for Budget Responsibility to see if growth and general economic forecasts  fall in line with the OBR figures. Europe is likely to continue its verbal rhetoric to calm concerns regarding EU debt levels and will want to be seen to push strongly on regulatory reform and fiscal tightening to tackle sovereign debt. The majority of data will come from the US where economic fundamentals are still showing a stable and ever recovering economy. Weaker data could, as it did last week, push the dollar higher on risk aversion as uncertainty remains over the impact the sovereign debt issues in Europe could have on the US and the recovery in the States loosing steam.  

Economic Data Releases