Daily Insight

The beleaguered U.S Dollar was given some respite last night as the Federal Reserve lifted interest rates for the 16th month in succession and gave the greenlight for further rate rises in the future but only if the economic data supports the view that the U.S economy is accelerating faster than expected. It was widely anticipated that the Fed would pause at 5% interest rates but the statement last night curiously omitted the comments from Ben Bernanke two weeks ago, in which he gave the clearest indication he could that the current rate cycle was coming to an end. In addition, the U.S Treasury decided against naming China as a 'currency manipulator' and instead expressed strong disappointment in Beijing's current inflexibility on their exchange rate. It can be argued that the U.S Treasury desire a weaker Dollar in order to make exports more attractive and therefore lower the ever-increasing Trade Deficit, which is released tomorrow and is expected to have widened significantly from February. There is some significant data released in the States this afternoon with Retail Sales expected to show further signs of growth, jumping 0.8% in April, which is the biggest sales gain in three months and Business Inventories is also released today with forecasters predicting a rise of 0.4% in March.

In the past 24hrs, the Pound has dropped off against the majors despite the UK Trade Deficit narrowing for the first month since October last year following a pick-up in UK exports and rising oil prices. However, the Bank of England lowered it's economic growth forecast for 2007 in an inflation report released yesterday, raising speculation that interest rates will need to be lifted by 0.5% in order to combat the threat of inflation coming in higher than the government's 2% target. There is some important data released this morning in the UK with Industrial Production and Manufacturing Output expected to show further signs of improvement with forecasters predicting a rise of 0.6% in March as the UK economy accelerated in the first quarter to its fastest pace in over a year.

With regards the Euro, economic growth in Germany came in lower than expectations, rising 0.4% in the first quarter due in part to extended wintry conditions, which have so far hampered production in Europe's largest economy. The ECB monthly bulletin is published in the Euro-zone this morning and following Jean-Claude Trichet's comments last week regarding future monetary policy, we will be looking for further evidence that the central bank will increase borrowing costs next month.

Data Released 11th May

UK Chancellor Brown Testifies to Treasury Committee

UK 09:30 Industrial Production (Mar)

- Manufacturing Output

EU 10:00 Flash GDP (Q1)

U.S 13:30 Retail Sales (April)

U.S 13:30 Business Inventories (Mar)

U.S 13:30 Initial Jobless Claims (w/e 29th April)

written by Adam Solomon