Daily Insight

The Dollar has come under renewed pressure over the past trading session, falling 0.1% against the Euro and a further 0.4% versus the Pound following a mixed bag of U.S economic data. Firstly, producer prices rose more than initially anticipated after energy prices accelerated in February and the figures support the Fed's view that inflationary pressures continue to be the biggest risk to economic expansion. Prices gained 1.3% following a 0.6% decline the previous month and with producer price inflation showing signs of accelerating, it will be difficult for the Federal Reserve to begin lowering interest rates this year. Over the past month, energy prices have risen 3.5% from January, which has filtered through to the price of fuel jumping 5.3%, the biggest monthly gain since October 2005. However, the Dollar failed to find support in the aftermath of the figure and also remained relatively unchanged after a separate report showed an unexpected drop in jobless claims over the past week, which indicates that the U.S labour market remains healthy. However, the U.S economy continues to be hampered by the slump in housing and manufacturing with reports yesterday showing that regional surveys in New York and Philadelphia declined beyond expectations. As a result, the Dollar declined against the majors and from a technical perspective the trend is beginning to increasingly likely that the U.S currency will continue to slide against both the Euro and the Dollar.

In terms of economic data, the focus today will fall on the monthly consumer price index, which will provide another gauge of inflation, and prices are expected to rise in February following a significant increase in petrol prices over the same period. The Dollar may find some support if the report exceeds initial expectations as it will look increasingly optimistic that the Federal Reserve won't be able to cut interest rates as inflation continues to threaten the pace of economic growth. Policy makers meet next week to discuss the current risks to price stability and it is widely anticipated that interest rates will remain unchanged at 5.25% for a sixth time this month. A separate report released this afternoon may also provide a boost to Dollar sentiment as U.S industrial production is poised to rise by 0.3% last month, which will provide an indication of a rebound in factory production and manufacturing output following the decline in January. However, it can also be argued that the Dollar may continue to decline this afternoon and fall to the weakest level this year against the Euro as the preliminary report on U.S consumer confidence may show that sentiment fell to the lowest level in six months. Lower stock prices and higher energy costs are expected to cause a downturn in confidence this month with the index expected to drop to a reading of 89.0 from 91.3 in February.

The positive sentiment surrounding the Euro continued yesterday as the single currency closed last night marginally higher against both the Pound and the Dollar despite a host of seemingly weak economic reports. The harmonised index of consumer prices showed that inflation remained below the European Central Bank's 2.0% target for a sixth successive month in February. Consumer prices in the Euro-zone increased 1.8% year-on-year last month, which was unchanged from January despite the recent rise in German inflationary pressures. Oil prices have declined a massive 24% from a record level in July last year, which has helped keep inflation below target but that has not stopped the ECB from raising interest rates consistently over the past eight months. However, policy makers within the ECB's governing council have expressed concerns that price increases will accelerate over the coming months, giving companies more scope to raise prices and encourage workers to seek higher wages. Therefore, an increase in labour costs combined with record low unemployment will help fuel inflation and force the Central Bank to continue raising interest rates beyond 4.0%.

Data Released 16th March

U.S 12:30 Consumer Price Index (February)

U.S 12:30 Real Earnings (February)

U.S 13:15 Industrial Production (February)

- Capacity Utilisation

U.S 14:00 Michigan Sentiment (March Prelim)

written by Adam Solomon