Daily Insight

The Dollar managed to claw back significant gains against the majors yesterday, firming an additional 0.6% versus the Euro and a further 0.3% against the Pound as we dropped back through 1.9600 by the close of trading last night. The Dollar rallied following the release of the ISM manufacturing index, which unexpectedly rose in February, suggesting that the slump in factory production may have peaked. The gauge of manufacturing rose to a reading of 52.3 last month after dropping to 49.3 in January and that was the lowest since April 2003 with a reading above 50 indicating expansion. The figure correlated with the views of the Federal Reserve Chairman, Ben Bernanke, who stated yesterday that there's a reasonable possibility that the pace of economic growth will quicken in the second half of the year. Elsewhere, the Dollar also received a boost following the personal income and expenditure report, which showed that spending increased beyond expectations in January while the Core PCE Deflator suggested inflation will continue accelerate and keep the Fed on red alert. Personal spending increased 0.5% following a 0.7% rise in December while a separate gauge of the report showed that the Fed's preferred measure of inflation increased 0.3%, the biggest monthly rise in five months. The Dollar may consolidate on the recent gains against the majors as the sole piece of economic data is expected to show that consumer sentiment in the Michigan area advanced to a reading of 95.0 in the February estimate.

The Euro came under modest pressure against the majors yesterday, dropping 0.1% versus the Pound following the released of the harmonised consumer price index, which showed that the core rate of inflation remained steady at 1.9%, suggesting that inflationary pressures have continued to moderate in the Euro-zone. In addition, the single currency has lost further momentum this morning as German retail sales declined by more than anticipated in January despite the record drop in unemployment in the area. Sales slumped a considerable 5.1% from December, which provides further evidence that the introduction of the VAT increase at the start of the year is beginning to weigh heavily on consumer sentiment. The Euro may struggle to bounce back today as a separate report later this morning is expected to show that producer price inflation dropped to an annual rate of 2.9% in January from 4.1% in December.

The Pound has managed to stage a mini-revival over the past trading session as a selection of reports have shown that UK house prices have risen beyond the decade high achieved earlier in year, prompting further speculation that rising interest rates will do little to curb demand. That sentiment was further emphasised yesterday as a report from the Bank of England showed that UK mortgage approvals rose beyond expectations in January, providing a further indication that growth in the housing market will strengthen over the coming months. UK house price inflation reached the highest level in more than three years last month and that will only create further speculation that the Bank of England will need to raise interest rates beyond the current 5.25%. Elsewhere, the Pound continued to make gains against the Euro as a separate showed that UK manufacturing expanded at the fastest pace in three years in February. The CIPS survey rose to a reading of 55.4 last month, the highest reading since July 2004.

Data Released 2nd March

EU 10:00 Producer Price Index (January)

U.S 15:00 Michigan Sentiment (February Final)

written by Adam Solomon