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The euro fell against both the pound and the dollar after euro zone GDP contracted

Today should see the pound take centre stage in the markets with the publication this morning of the latest UK unemployment data together with the minutes of the Bank of England (BoE) Monetary Policy Committee (MPC) meeting from the beginning of the month when the decision was taken to keep both interest rates and the MPC’s Quantitative Easing budget unchanged. The voting pattern of the nine member MPC will be closely watched as it will give a hint as to policy for the upcoming meeting at the beginning of September.

Yesterday, the Office for National Statistics (ONS) reported that UK house prices rose by 0.5% month-on-month in June after a flat month in May. ONS statistics lag more recent figures as they are compiled based on mortgage completions and not mortgage offers. In contrast, both the Nationwide and the Halifax have recently reported house price falls, down 0.7% and 0.6% month-on-month respectively, based on mortgage offers whilst the Royal Institution of Chartered Surveyors (RICS) has also reported that its property price balance fell to a 12-month low of -24 in July from -22 in June, reflecting considerably more surveyors seeing prices fall than are seeing a rise.

Dr Howard Archer, Chief UK Economist at IHS, said he expected house prices to fall by at least 3% from current levels.

Dr Archer added that the “funding for lending” scheme launched at the start of August by the BoE and the Treasury was unlikely to be a major factor in the near term at least.

Meanwhile the ONS reported an unexpected rise in UK inflation in July with the UK Consumer Prices Index (CPI) rising at an annual rate of 2.6% in July, wrong-footing experts who had forecast a fall to 2.3%. The wider Retail Prices Index (RPI) rose by 3.2%, up from 2.8% in June.

Analysts say that in terms of general price rises, July’s inflation figure should not cause too many concerns.

Vicky Redwood, UK Economist at Capital Economics, said July’s unexpected rise in inflation was disappointing, but was likely to be “just a temporary blip”.

Elsewhere, US retail sales data out yesterday beat expectations by increasing by 0.8% in July, compared to the 0.2% consensus estimate, prompting speculation that third-quarter gross domestic product (GDP) growth in the US may be better than the 1.5% growth seen in the second quarter.

Yesterday, the euro fell against both the pound and the dollar after euro zone GDP contracted by 0.2% in the second quarter.

The euro has been steadier since European Central Bank (ECB) President Mario Draghi pledged to do “whatever it takes to preserve the euro” a few weeks ago but the continuing slowdown in all the euro zone economies together with the ongoing sovereign debt crisis continues to drain confidence.
Even the mighty German economy is beginning to show signs of fatigue, recording growth of just 0.3% in the second quarter of 2012 and the German ZEW survey on economic sentiment came in lower again this month to mark the fourth straight monthly decline and an annual low.

The German economic sentiment index for August came in at -25.5, down from the previous month’s -19.6, according to the ZEW Institute. The market consensus was looking for a slight improvement to -19.3 while the ZEW economic sentiment index for the euro zone rose by 1.1 points to -21.2 from the previous -22.3. The current situation index fell by 2.2 to -75.1 points.

Eurostat, the statistical office of the European Union reported yesterday that euro zone GDP fell by 0.2% compared with the previous quarter with France, the second biggest economy in the euro zone registering its third consecutive quarter of zero growth. Among the worst performers in the second quarter were Finland, Portugal, Cyprus and Italy, which all registered falls of around 1%.

The strongest figures came from Sweden, which posted a 1.4% rise in GDP.