Daily Insight

Following the damning testimony from the Governor of the Bank of England on Wednesday, the Pound has been under renewed pressure against the majors amid concerns that UK economic growth will slow to just 1.0%, while a softening labour market and higher prices will lead to a period of stagflation.

UK consumer prices breached the government’s 3.0% barrier last month while record high raw material costs have left manufacturers will little option but to pass on higher costs to the consumer.

In addition, the number of people unemployed and claiming benefits rose for a third consecutive month in April while personal income accelerated beyond initial forecasts and to the highest level since November.

Rising prices and tighter lending conditions means that consumers are forced to demand higher wages and thusly stoke inflation while chocking growth. A separate report from the Royal Institution of Chartered Surveyors showed that the house price balance fell to the weakest level on record as prices declined across Britain.

The Bank of England have revised their expectations for UK economic growth, down from 1.6% to just 1.0% this year and the price action surrounding the Pound reflects the degree of pessimism within the Central Bank.

Despite the staunchly hawkish stance of the ECB’s governing council members, the Euro has continued to decline against the Dollar this week as a distinct lack of economic indicators fail to provide any further insights into the outlook for the Euro-zone economy.

However, the flash estimate of European gross domestic product showed that economic growth accelerated more than forecast in the first quarter. The resilience of the German economy shows few signs of cracking as the strongest pace of growth in 12-years has brought Europe through the credit crisis and left the ECB to focus on the threat of inflation.

Consumer prices have remained above the Central Bank’s comfort zone for eight consecutive months while a robust labour market will support consumer spending as commodity prices rocket to record levels.

In the aftermath of the report, the Euro staged a modest recovery against the Dollar and made further gains versus the Pound amid suggestions that the ECB will keep interest rates unchanged this year.

The renewed appetite for higher yielding assets has seen the Dollar advance against most of the 16 most actively traded currencies but the U.S currency fell yesterday following reports that industrial production contracted by more than twice as much as forecast.

The Empire state manufacturing index also showed that regional activity in the New York State declined unexpectedly in May and the report reinforces Ben Bernanke’s comments earlier this week.

The Fed Chairman insisted that the turmoil surrounding credit markets is far from over and comes in stark contrast to the recent rhetoric from the Treasury Secretary, Hank Paulson, who said that the economy was through the worst of the credit crunch.

The focus today will fall on the Michigan consumer sentiment index, which is expected to show that confidence declined in May as rising unemployment and higher prices restrict spending.

Data Released 16th May

U.S 13:30 Housing Starts (April)

U.S 14:55 Michigan Sentiment (May Prelim)

written by Adam Solomon

The Pound failed to rally against the majors on Tuesday as the negative sentiment surrounding the UK economy offset the rising inflationary concerns and speculation that the Bank of England can’t afford to cut interest rates in June.

UK producer and consumer prices rose well beyond initial forecast in April with the annual rate of inflation jumping to the highest level in over a year following record high food and energy costs.

The upside risks to price stability came in the build up to the Bank of England’s quarterly inflation today and the Governor, Mervyn King, signalled that the MPC are reluctant to continue cutting interest rates while economic growth will slow to just 1.0%.

In a much publicised statement, King said that inflation will breach the government’s 3.0% limit this year and rise to 3.7% over the coming months as rising commodity prices means that the Bank face a difficult balancing act in the months ahead.

The tone of the statement seemed to suggest that a further reduction in rates would make matters worse with a drop towards 4.5% exasperating the already severe inflationary concerns.

The Futures market has scaled back the probability of a June rate cut in the aftermath of King’s comments while a recent spate of damning economic reports shows that the slump in housing is pulling down economic growth.

The tone of the Bank’s quarterly inflation report mirrors the recent commentary from the Chancellor, Alistair Darling, who back the BoE’s stance on inflation and expressed his concerns on rising food and energy costs.

The price action surrounding the Pound suggests that the market is focused on the downside risks to growth rather than upside risks to inflation and the UK currency plunged 0.3% versus the Dollar before staging a modest recovery.

The fundamental lack of economic data released in the Euro-zone means that the single currency has been susceptible to events from overseas but the focus tomorrow morning will fall on the final estimate of the Harmonised index of consumer prices.

The broadest measure of inflation across the 15 nations that share the Euro will probably show that prices increased 0.3% in April to an annual pace of 3.3%. A separate report on Euro-zone gross domestic product will also confirm that growth in the economy fell under 2.0% in the first quarter and confirm that the U.S led economic slowdown is filtering through to Europe.

The dramatic revival in Dollar sentiment continued today as the U.S currency traded near the highest level in a week versus the Euro as gains in stocks led to a renewed appetite for higher yielding assets.

Elsewhere, the Dollar gained in support and rose to the highest level this year versus the Pound before a government report showed that U.S inflation accelerated less than forecast in April.

Consumer prices increased 0.2%, following a 0.3% gain the previous month, and suggests that the Fed can enter a period of monetary stability after slashing rates by 325 basis points in a vain attempt to bring some stability to the U.S housing sector.

Data Released 15th May

EU 09:00 ECB Monthly Bulletin Published

EU 10:00 Flash GDP (Q1)

EU 10:00 Flash Harmonised Consumer Prices (April)

U.S 13:30 Initial Jobless Claims (w/e 10th May)

U.S 13:30 Empire State Index (May)

U.S 14:00 TICs Net Capital Inflows (March)

U.S 14:15 Industrial Production (April)

U.S 15:00 Philly Fed Index (May)

U.S 18:00 NAHB Housing Index (May)

written by Adam Solomon

The Pound enjoyed a strong intraday rally against the Dollar on Monday as UK producer prices accelerated at the fastest pace in 22-years last month and showed that manufacturers have little choice but to pass on record high raw material costs to the consumer.

The report sparked a mini revival in Sterling sentiment as rising inflationary pressures make it difficult for the Bank of England to begin a prolonged period of monetary easing. However, the Pound resumed the downward momentum against the Dollar today, dropping ever closer towards the yearly low at 1.9388.

The downside momentum also continued against the Euro despite another round of particularly hawkish inflationary data. The Consumer Price Index, which is widely regarded as the broadest measure of inflation, showed that prices rose 3.0% from this stage last year to report the biggest monthly increase since 2002.

Rising food and energy costs have stoked inflation but the report massively exceeded initial forecasts and will force the Governor of the Bank of England to write a letter of explanation to the government. The two reports combined have sparked controversy that the real threat to the UK economy is inflation and the MPC may need to rethink their plans of a June rate cut.

The Pound rose as much as 0.3% against the Dollar in the minutes that followed the report but failed to consolidate on those gains as the Futures market continues to price in a 81% chance of a 25 basis point reduction next month.

The outcome of the June meeting should become clearer after the Bank of England’s quarterly inflation report tomorrow morning, which should be hawkish in tone given the recent commentary from Mervyn King and the dramatic increase in consumer prices.

The Euro has been susceptible to a barrage of weak data in recent weeks and the single currency has continued to decline against the Dollar while taking advantage of broad Sterling weakness to close tonight under the 1.2600 level.

A number of European Finance officials continue to focus on the upside risks to price stability while also recognising that record high food and petrol prices will weigh on consumer spending.

Euro-zone retail sales dropped by the most since records began in March while the cost of oil has nearly doubled over the past year and reached another record high $1.2698 a barrel.

The surge in commodity prices prompted ECB governing council member, Jean-Claude Juncker, to reiterate that “inflation remains a major concern”. That sentiment was reflected by the President of the Central Bank, Jean-Claude Trichet, who said that inflation will remain high for some time, which indicates that the ECB are in no hurry to reduce interest rates.

In terms of economic data, the Euro may come under some pressure tomorrow morning as a gauge of industrial production is expected to show a further softening in output for March.

The Dollar rebounded from a four day losing streak versus the Euro and also registered further gains against the Pound after a government report showed that U.S retail sales exceeded initial forecasts in April and added to speculation that the Federal Reserve will stop cutting borrowing costs.

The resilience in consumer spending will help support economic growth this year amid continued weakness in the housing and non-manufacturing sectors. Sales rose 0.5% last month, following a revised 0.4% increase in March, and the Dollar rallied against most of the 16 most actively currencies amid speculation that economy will pull back from the brink of recession.

Elsewhere, the Dollar stood firm as the Fed Chairman, Ben Bernanke, did his best to supper the renewed optimism surrounding the outlook for the U.S economy. In a speech in Atlanta today, Bernanke said that the turmoil surrounding financial markets is far from over and that the Reserve Bank will increase its monthly auction of emergency funding.

His comments are in stark contrast to a recent testimony from the Treasury Secretary, Hank Paulson, who said that the worst of the credit crisis is behind us.

Data Released 14th May

U.K 09:30 BoE Inflation Report

U.K 09:30 Average Earnings (3 months to March)

U.K 09:30 Claimant Count Unemployment (April)

EU 10:00 Industrial Production (March)

U.S 13:30 Consumer Price Index (April)

- Ex Food & Energy

written by Adam Solomon

The Pound rallied against the majors yesterday, rising from a three month low versus the Dollar, while also registering gains against the Euro following an unexpected surge in U.K producer prices.

The report from the Office of National Statistics showed that UK factories raised prices at the fastest annual pace since records began in 1986, indicating that a sharp increase in the cost of raw materials will stoke inflation.

In the aftermath of the report, Bonds plunged and the Pound rallied as the sharp rise in factor-gate inflation emphasised the recent statement from the BoE Governor, Mervyn King, who said that commodity price gains will push inflation through the government’s 3.0% limit.

The Bank’s Monetary Policy Committee face a difficult balancing act in the months ahead but the quarterly inflation report this morning should provide a further insight into the probability of a June rate cut.

The nine-strong committee left interest rates on hold at 5.0% in May after implementing three quarterly reductions since December. The Pound enjoyed a sharp intraday swing against the Dollar, rising as much as 0.5% by the close of trading last night and the UK currency could extend its run today with consumer prices expected to increase to 2.6% year-on-year in April.

However, a separate report on the UK property market will show that prices fell in March while the BRC retail sales survey is expected to confirm that tighter lending conditions is restricting spending.

The renewed appetite for the Dollar has gathered momentum in recent weeks as the U.S currency rose to the highest level since February against the Pound while appreciating 3.4% versus the Euro following the G-7 meeting in March.

The representatives highlighted the Dollar’s severe decline in value and emphasised their concerns over volatile moves in the currency market. It is surely no coincidence that the Dollar has rallied in the weeks that followed the meeting and for the first time since December 2005, traders are becoming increasingly confident that the Fed will refrain from lowering interest rates in June.

The bullish sentiment surrounding the Dollar is likely to continue despite a host of negative economic data as the focus switches to the retail sales report this afternoon. Rising consumer prices and falling home values has restricted spending with sales expected to show a 0.1% fall in April.

Data Released 13th May

U.K 09:30 BRC Retail Sales (April)

U.K 09:30 DCLG House Prices (March)

U.K 09:30 Consumer Price Index (April)

- Retail Price Index

U.S 13:30 Export / Import Prices (April)

U.S 13:30 Retail Sales (April)

U.S 15:00 Business Inventories (March)

Following on from last week, the Pound came under further pressure against the majors, falling to the lowest level since February against the Dollar, amid speculation that the Bank of England will cut interest rates by a further 25 basis points in June.

The Monetary Policy Committee, led by the governor Mervyn King, met last week and elected to keep the benchmark lending rate on hold at 5.0%. Rising inflationary concerns and a hawkish financial stability report have convinced policy makers to wait and assess the impact of three previous rate reductions while consumer prices look set to increase dramatically over the coming months.

The Pound also fell for the first week in a month against the Euro as tighter lending conditions saw the biggest drop in consumer spending in at least four years while a faltering economy may lead to a prolonged period of monetary easing.

The pessimistic outlook for the UK economy shows few signs of abating as a separate report on Friday added to recent evidence that the housing market is slowing after ten consecutive years of growth.

House prices fell 2.5% in March while courts issued the highest number of orders for home repossessions since the end of the last recession in 1992. Elsewhere, the Pound is likely to struggle against the majors in the near-term as a slowdown in manufacturing and consumer confidence fuels speculation of a June rate cut.

The focus this week will switch to the Bank of England’s quarterly inflation report on Wednesday and given the recent increase in commodity prices, the tone and language used in the statement will be heavily scrutinised for any clues on future policy.

The renewed appetite for the Euro gathered in momentum towards the end of the last week as the single currency registered gains against most of the 16 most actively traded currencies following the ECB interest rate announcement and press conference.

The Central Bank’s President, Jean-Claude Trichet, said that inflation remains the top priority over the coming months while the language used in the statement seemed to indicate that interest rates will remain on hold over the coming months.

The European Union has said recently that retail sales have fallen 1.6% over the past month while oil prices rose to a record $126 a barrel on Friday as soaring fuel prices weighs on confidence. However, the annual pace of inflation has accelerated to 3.3% in March and the latest figures are forecast to show an even bigger increase in April.

The final estimate of Euro-zone consumer prices probably rose to 3.6% in April, well above the Central Bank’s 2.0% target, and vindicate the ECB’s decision to keep interest rates steady amid the ongoing crisis in credit.

The Euro may find further support this week as a hawkish inflation report may coincide with the latest quarterly GDP numbers and the index is expected to show that activity levels are holding up reasonably well in the face of a U.S led economic slowdown.

The renewed appetite for the Dollar saw the U.S currency extend its recent run against the majors, consolidating around the highest level in two months versus the Euro while sailing through the trend support at 1.9650 against the Pound to close at the highest rate in 11-weeks.

The renewed sense of optimism surrounding the Dollar can be attributed to speculation that the Federal Reserve will leave interest rates unchanged in May after reducing borrowing costs by 325 basis points in just six months.

The daily fundamentals have painted a rather gloomy picture for the U.S economy but the Dollar found some support on Friday as the U.S trade deficit narrowed by more than anticipated in March despite a slump in overseas demand.

The Dollar’s resilience to a seemingly endless line of weak economic reports also comes in the aftermath of the G-7 meeting last month where officials outlined their concerns over the Dollar’s dramatic drop in value over the past year.

The Dollar had fallen to the lowest level on record against the Euro but in the weeks that followed the G-7 meeting, the U.S currency has advanced 3.4% from the 1.6019 low. The idea that the Dollar is stabilizing has prompted U.S and European officials to express their satisfaction over the recent upside momentum and that may see the Dollar make further gain against the majors this week.

Data Released 12th May

U.K 09:30 Producer Price Index (April)

- Output

U.K 09:30 Trade Balance / Non EU Trade (March)

U.S 19:00 Federal Budget (April)

written by Adam Solomon

The Pound has struggled against the majors this week as the focus switched to the Bank of England interest rate announcement yesterday and the UK currency plummeted to a near three month low versus the Dollar following speculation of a surprise quarter-point reduction.

A recent spate of negative economic reports has undermined the Bank’s optimistic financial stability report as house prices suffered the first annual decline since 1996 and consumer confidence plunged to the lowest level in five years.

The Monetary Policy Committee have lowered UK interest rates on three occasions since the turn the year in a vain attempt to bring some stability to the market while the crisis in credit shows few signs of slowing.

Lenders have been forced to raise mortgage rates and even withdraw some of their best offers from the market as losses linked to the U.S subprime mortgage crisis caused the first run on a UK Bank in nearly a century.

However, the Bank of England elected to keep the benchmark lending rate unchanged at 5.0% yesterday as record high oil prices threaten to fuel inflation. In the wake of the April rate cut, the minutes from the Bank’s last policy meeting showed that two members out of the nine strong committee voted in favour of a greater 50 basis point reduction last month.

The extent of the division with the Bank of England will not be fully exposed until the minutes of the May meeting are released later this month and the Pound may come under further pressure over the coming weeks amid suggestions of a June rate cut.

In the aftermath of the BoE rate announcement, the European Central Bank also held rates unchanged in May and the Euro rebounded from a two month low against the Dollar after the tone of the Central Bank’s accompanying statement showed that inflation remains the top priority.

The resilient of the Euro-zone economy combined with the ECB’s staunchly hawkish stance on inflation has seen the single currency appreciate to record highs against both the Pound and the Dollar this year and the report yesterday showed that policy makers are in no hurry to begin cutting interest rates.

The Chairman of the Central Bank, Jean-Claude Trichet, seemed to ignore the downside risks to economic growth and said that inflation will stay above 3.0% “for a rather protracted period”.

An EU report earlier this week showed that retail sales fell to the lowest level since the series began in 1995 to indicate that consumers are struggling with record high energy costs. However, the European Central Bank will probably hold rates steady at 4.0% over the coming months and retain a tightening bias until the fastest pace of inflation in 16 years shows some signs of slowing.

The Dollar rose to the highest level since February against the Pound and bounced off the support at 1.9500 before a report from the Commerce Department showed that wholesale inventories unexpectedly declined in March following a dramatic increase in oil prices and shorter supplies.

The modest 0.1% drop represents the first reduction since December 2006 and the report provides an indication that consumers are struggling with record high fuel costs while falling home values has restricted spending.

The U.S Treasury Secretary, Hank Paulson, has recently said that the economy is through the worst of the credit crisis but the latest figures show that the gross domestic product grew at the slowest pace since the last recession in 2001.

The Dollar has found some support this week amid speculation that the Federal Reserve will keep rates unchanged this month but a softening in the labour market, rising foreclosures and dwindling confidence may see the Dollar struggle to extend its rally beyond the current levels as the economy stands on the brink of recession.

Data Released 9th May

U.S 13:30 Trade Balance (March)

written by Adam Solomon

The Pound has been under real pressure against the majors this week and the UK currency plummeted through the trend support at 1.9650 against the Dollar to close last night at the lowest level in nearly three months.

The Pound also fell for a third straight day against the Euro after an industry report showed that UK consumer confidence declined to the weakest in at least four years last month. According to the report from the Nationwide Building Society, an index of consumer sentiment fell to the lowest level since the survey began in May 2004 and speculation has intensified that the Bank of England may bring forward their next interest rate reduction.

In addition, the Pound extended its losses versus the majors after a separate report from the Office of National Statistics showed that UK manufacturing unexpectedly declined in March. Factory output fell 0.5% from the previous month as the turmoil in credit markets swept through the economy, while higher commodity prices and a weaker currency means that inflation will probably exceed the Bank’s 2.0% target for the remainder of 2008.

Renewed concerns over inflation has coincided with the price of oil rocketing through $122 a barrel and the recent commentary from a number of MPC officials suggests that policy makers will resist cutting rates this afternoon with the next likely move coming in June.

The Euro traded in a very tight trading range against the Dollar yesterday but the single currency may resume its recent downward trend amid speculation that the ECB will focus on the downside risks to economic growth and soften their stance on inflation.

A spate of negative economic indicators has paved the way for the Central Bank to begin a period of monetary easing as cracks begin to appear in the Euro-zone economy after the fallout from the seizure in credit markets.

However, consumer prices have remained well above 3.0% over the past four months and with commodity prices climbing to record highs in recent weeks, policy makers will have little choice but to keep rates on hold at 4.0%

The European Central Bank face a difficult balancing act in the month’s ahead and the Euro has been under pressure as traders speculate on the timing of the first interest rate cut. In terms of economic data, European retail sales plunged 1.6% in March to record the biggest monthly decline since records began in 1995 as consumers struggled with record high food and fuel prices. The latest report from the European Union only compounds economists worst fears and indicates that the economy is slowing under the weight of a U.S led economic slowdown.

The revival in Dollar sentiment gained in momentum yesterday as the U.S currency rose to the highest level since February against the Pound amid suggestions that the Federal Reserve will keep interest rates on hold in May.

Despite another decline in pending home sales, the Dollar shrugged off a host of weak economic reports to record gains against the majority of the 16 most actively traded currencies. As the focus switches to events in the U.K and Europe today, the Dollar may continue its upside momentum in the near-term amid suggestions that the worst of the credit crisis is over.

Data Released 8th May

U.K 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 3rd May)

U.S 15:00 Wholesale Inventories (March)

written by Adam Solomon

The Pound Rose to the highest level since February against the Euro last week but the UK currency relinquished much of the gains yesterday following a disappointing report on service sector growth.

An index of business sentiment showed that growth in UK service industries unexpectedly slowed to the weakest pace in five years in April as the turmoil surrounding credit markets hampered economic growth.

The report from the Chartered Institute of Purchasing and Supply fell to a reading of 50.4 last month, the lowest since March 2003, with a figure above 50 indicating expansion. A spate of surprisingly positive economic reports coupled with the hawkish tone of the Bank of England’s financial stability report have all but ended the prospect of a further cut in UK interest rates this month but the drop in services suggests that the Bank may need to act in June.

The Pound also declined against the Dollar in early trade, bouncing off the support at 1.9650 before a close towards the intraday high at 1.9750. The UK economy is in a period of slower growth while tighter lending restrictions will see the slump in housing lead to an inevitable slowdown in consumer spending.

However, UK consumer prices are forecast to hit 3.0% this year and rising inflationary pressures means that the Bank of England are unlikely to follow the Fed in an aggressive period of monetary easing and that may support the Pound in the short-term.

The Euro has risen for a second consecutive day versus the Dollar while the single currency also registered gains against the Pound amid speculation that the ECB will retain a hawkish stance on monetary policy and hold interest rates at the highest level in six years.

The Euro has enjoyed the biggest intraday move in two weeks against the majors as the ECB President, Jean-Claude Trichet, gave a very public reaction to the soaring price of oil. The economic outlook has soured in recent weeks as the ECB finally acknowledged that Europe is no longer immune to the credit crisis, leading to speculation that the Central will lower interest rates this year.

However, food and energy prices continue to rise and the cost of oil has remained above $120 a barrel, which means that the ECB’s accompanying statement should emphasise the ongoing risks to inflation and provide some support to the Euro.

In terms of economic data, the focus this morning will fall on European retail sales for March with the index expected to report a 0.2% increase and provide a further indication that tighter lending conditions is weighing on consumer spending.

The fragility surrounding the Dollar was exposed perfectly yesterday as the U.S currency relinquished earlier gains against the both the Pound and the Euro amid a mixture of weaker economic reports and soaring commodity prices, which threaten the pace of economic growth.

Oil prices reached another record high yesterday, surging past $122 a barrel, as rising producer costs stoke inflation and a provide a difficult balancing act for the Federal Reserve. Although the Dollar is still 3% higher against the Euro from this stage in April, the prospect of the U.S currency extending its rally beyond the current level looks increasingly unlikely.

A number of major U.S banks are reporting massive first quarter deficits as the Washington based company, Fannie Mae, said that its credit market losses will be worse next year than in 2008 after rocketing to a larger than forecast $2.19 billion.

The world’s biggest banks and securities firms have slashed 65,000 jobs in the past 10 months and the latest revelation has prompted speculation that the Fed will have to continue lowering interest rates beyond the current 2.0%.

Data Released 7th May

UK 09:30 Industrial Production (March)

- Manufacturing Output

EU 10:00 Retail Sales (March)

GER 11:00 Industrial Orders (March)

U.S 13:30 Labour Costs (Q1)

- Productivity

U.S 15:00 Pending Home Sales (March)

U.S 20:00 Consumer Credit (March)

written by Adam Solomon