Daily Insight

The Dollar came under renewed pressure against the majors yesterday, dropping 0.3% versus the Euro and the Pound following a report on the U.S property market, which showed that new homes sales unexpectedly fell in February. Following the rebound in another gauge of house prices last week, speculation had been building that the biggest slump in the market for over 17-years had finally peaked. However, the report from the Commerce department yesterday showed that the sales of new homes had plummeted to the lowest level in nearly seven years, diminishing the prospects for a revival. In addition, the number of unsold homes on the market reached the highest level in 16-years with purchases dropping to an annual pace of 848,000 last month, which was significantly under forecasts. Therefore, the contrasting figures of last week will fuel further speculation that the housing market will be unable to support economic growth this year as higher interest rates continue to discourage first-time buyers. Nevertheless, the sustained growth in the U.S labour market is likely to propel growth this year and supplement the slump in housing, helping the consumer to maintain spending and preserve economic expansion.

In terms of economic data, the Dollar may come under further pressure today as a report on consumer confidence is expected to show that sentiment fell from a five-year high in March. The fallout from the subprime mortgage lending crisis is likely to weigh on optimism while higher fuel prices are also expected to have an impact as the index of consumer confidence falls to a reading of 108.5 from 112.5 in February. Recent surveys from the University of Michigan have shown that consumer sentiment fell to a six-month low in the preliminary estimate earlier this month while retail sales have also rose less than forecast as higher fuel prices limited spending. Another concern to consumer sentiment will be rising mortgage defaults with home foreclosure filings jumping 12% year-on-year in February as homeowners struggled with the decline of property values and higher mortgage rates. The concerns over rising petrol prices were further emphasised yesterday as crude oil jumped to the highest pace this year following the capture of British naval personnel in Iran.

The Euro continued to slide against the Pound yesterday but made modest gains versus the Dollar by the close of trading last night despite a lack of economic reports released in the Euro-zone. The single currency may continue to struggle this morning as a report may show that German business confidence fell for a third consecutive month in March on concerns that the tax increase will restrain consumer spending while export growth continues to slow. The Ifo index into business sentiment reached a record high in December but since the introduction of the value-added tax increase at the start of the year, the survey has continued to decline with a reading of 106.5 anticipated from 107 in February. In addition, the Euro has appreciated 10% against the Dollar in the past year alone and combined with a slowing U.S economy, German export growth may continue to dwindle after driving economic expansion to the fastest pace in six years in 2006. Elsewhere, the Euro did find some support yesterday following a statement from a member of the ECB's governing council, Nicholas Garganas, who said that European interest rates may not have peaked yet and opened the door for further monetary tightening. In stark contrast, outgoing ECB member, Mitja Gaspari, has stated in the past week that inflation in the Euro-zone is under control and talk of any further rate increases is premature.

GER 09:00 Ifo Business Climate Index (March)

U.S 15:00 Consumer Confidence (March)

written by Adam Solomon