Daily Insight

The Pound remained largely unchanged against both the Euro and the Dollar yesterday despite a host of negative economic reports, which gave way to speculation that growth in the property market has peaked as prices fell 0.4% in March. Earlier in the session, the Pound came under increased pressure against the majors and dropped briefly below 1.9600 versus the U.S Dollar as the final estimate of UK GDP showed that economic growth was unexpectedly revised down in the fourth quarter of last year. Gross domestic product rose 0.7%, which was unchanged from the previous quarter, while the annual pace of economic expansion remained above trend growth at 3.0%. Recent reports have suggested that growth in the service sector has stagnated from previous months and that has led to further speculation that the Bank of England will continue to assess the impact of three previous rate increases before a likely move in May. Elsewhere, the Pound managed to remain relatively strong despite a separate report, which showed that the UK current account deficit widened to a record level in the fourth quarter of 2006. There is some significant economic data released in the UK this morning with the focus falling on mortgage approvals for the month of February and a separate report from the Confederation of British Industry on the distributive trades balance. Following a downward swing in house prices over the past month, it is widely anticipated that mortgage approvals fell to 118,000 last month and any revisions under that figure may weigh on Sterling sentiment.

The Euro remained relatively unchanged against the majors yesterday despite yet another round of hawkish rhetoric from a number of ECB policy makers including the chairman, Jean-Claude Trichet, who emphasised that monetary growth is vigorous while interest rates are still at an accommodative level. That sentiment was also expressed by a number of governing-council members and it seems almost certain that the Central Bank will continue raising rates above the current 3.75% in the near short-term. There was a mixed bag of economic data released yesterday as the focus fell on Euro-zone money supply with growth in the M3 remaining particularly strong and emphasised that inflationary pressures continue to mount. The Euro has already made modest gains this morning as the Purchasing Manager's index on European retail sales rose for the first time in three months in March. Last month the European Commission raised its 2007 growth forecast for the economy to 2.4% from 2.1% and highlighted that retail growth would be a major factor in expansion this year as German consumer confidence rebounds after the imposed sales tax increase. Elsewhere, a separate report this morning has confirmed that unemployment in Germany dropped to lowest level in over five years last month.

The Dollar managed to hold firm yesterday despite rumours of a military incident involving Iran and a U.S war ship, which rattled investor confidence and sent oil hurtling towards $65 a barrel. Although it has since appeared that the alleged incident did not take the place, it emphasised the nervousness in the market and the possible implications of instability in the Middle East as oil rose for a seventh day in succession and sparked concerns of a U.S recession. The Dollar also managed to hold steady despite a report on U.S durable goods orders, which rose less than forecast in February, rising just 2.5% with orders excluding transportation declining 0.1%. However, the data was largely ignored by the market as the focus seemed to fall on a statement from the chairman of the Federal Reserve, Ben Bernanke, who said that monetary policy is still orientated towards controlling inflation despite a shift in tone from the Fed in the last FOMC announcement. His comments reflected no reference towards a cut in U.S interest rates as he stated that the Central Bank's decision to move to a more neutral stance simply gave policy makers more room to manoeuvre. The Dollar may come under some pressure this afternoon as report on U.S economic growth may show that the economy expanded at an annual pace of 2.2% in the final quarter of 2006 as the slump in housing and business spending shows no signs of ending.

Data Released 29th March

UK 09:30 Mortgage Approvals (February)

UK 11:00 CBI Distributive Trades Balance (March)

U.S 13:30 GDP / Deflator (Q4 Final)

U.S 13:30 Initial Jobless Claims (w/e 24th March)

written by Adam Solomon