Daily Insight

The recent positive sentiment surrounding the Pound continued yesterday as strong growth in the retail sector pushed the UK currency to a six-week high against the Dollar while also gaining 0.2% versus the Euro by the close of trading last night. Following the Bank of England's decision to lift interest rates on three separate occasions since August, it was widely anticipated that consumer spending, which accounts for a large proportion of economic growth, would continue to struggle over the coming months. UK retail sales declined 1.5% in January, which suggested that higher interest rates were weighing heavily on sentiment but the figures for February surged 1.4% and confirmed that the decline of the previous month was largely the result of seasonal effects. Therefore, the consumer sector is still looking relatively healthy and following the report yesterday it remains clear that the Bank of England will raise UK interest rates at least once more of the coming months to quash any lingering concerns about the upside risks to inflation. As a result, the Pound is set for its first weekly gain in a month against the Euro as reports showed that consumer price inflation unexpectedly accelerated, holding above the 2.0% target in February while the rebound in retail sales may prompt the MPC to raise rates early in April.

The Euro fell further against the Pound yesterday but achieved a fresh two-year high versus the Dollar before closing just 0.2% higher against the U.S currency amid a distinct lack of European economic data. Industrial Orders in the Euro-zone came in largely as expected in January and showed that growth in factory production continued to expand after the fastest economic growth in over six years. A number of key ECB speakers have been scheduled over the course of the week including the chairman, Jean-Claude Trichet, who failed to provide any further insights into the outlook for future monetary policy as he testified to the EU Parliament on Wednesday. In terms of economic data, the Euro may struggle to rebound against the Pound as a report this morning may show that the European current account balance remained unchanged at €2.3 billion in January.

The Dollar managed to stage a modest rebound against the majors last night, recovering from a fresh two-year low versus the Euro as the Federal Reserve kept interest rates on hold for a six month and softened its tightening bias in the accompanying statement. Therefore, it seems evermore likely that the Fed will begin cutting interest rates in the second half of the year as U.S economic growth continues to slow while inflation is expected to moderate. In terms of economic data, the Dollar came under further pressure yesterday as a closely watched gauge of the future direction of the U.S economy fell by the most in a year in February. Following a severe dip in consumer sentiment, an index of leading economic indicators fell 0.5%, which was higher than expected and supports the view of slow to moderate growth this year. In addition, there have been signs of rising unemployment as weekly jobless claims averaged 335,000 in February while non-farm payrolls slumped to just 97,000 compared with a monthly average of 189,000 in 2006. The Dollar may decline further this afternoon as report on the U.S housing market may show that the sales of existing homes slowed in February, sparking fresh concerns that the slump in housing has yet to peak.

Data Released 23rd March

EU 10:00 Current Account Balance (January)

U.S 14:00 Existing Home Sales (February)

written by Adam Solomon