Daily Insight

The Dollar came under increased pressure against the majors yesterday, falling a further 0.2% versus the Euro and also fell modestly against the Pound following a disappointing report on the U.S retail sector. Growth in sales came in well under expectations in February, increasing just 0.1% from the previous month despite forecasts of a 0.3% gain as higher fuel prices combined with colder weather limited consumer spending. The Federal Reserve have been quick to acknowledge the significance of a strong retail sector and the figures yesterday have sparked concerns that consumer spending will be unable to support economic growth this year. The focus today in terms of economic data will fall on the release of U.S current account balance, which is expected to show that the deficit narrowed from a record level in the fourth quarter of last year as lower oil prices reduced imports. The shortfall, which represents the broadest measure of trade in the States, is expected to fall from $225.6 billion in the third to $203.5 billion by the turn of the year, narrowing for the first time since 2001. Recent reports have suggested that the overwhelming deficit represents the single biggest risk to global stability and any signs that it has narrowed in the final quarter of 2006 may provide a timely boost to the Dollar.

The positive sentiment surrounding the Euro continued yesterday as the single currency closed last night 0.2% higher against both the Pound and the Dollar following yet another positive report on the German economy. The ZEW Investor confidence survey rose well above expectations and the index will only provide further evidence that economic growth in Europe's largest economy will be able to sustain momentum this year following the fastest expansion since 2000. Investor confidence has risen to the highest level in eight months in March and it seems increasingly likely that the German economy will be able to overcome the increase in sales tax and a slowdown in U.S economic growth. As a result, the Euro made widespread gains against most high-yielding currencies in the aftermath of the figure and overnight the single currency has increased to the highest level against the Pound since August last year. A separate report yesterday also showed that German consumer spending exceeded growth in disposable incomes last year for the first time in six years and combined with recent positive reports on manufacturing and unemployment, the European economy will continue to gather momentum.

The Pound has declined heavily against the majors in the wake of the political unrest and the threat of a Labour rebellion as we drop back towards the yearly lows against both the Euro and the Dollar overnight. Initially, Sterling managed to make modest gains against the U.S currency after a report from the Office of National Statistics showed that Britain's trade deficit narrowed by the most in a year in January. The shortfall in trade came in at £6.2 billion, the lowest since October 2005 as imports fell and exports jumped 8.8% from the previous month. However, the Pound has failed to capitalise on the positive report as the Stock market continues to plummet and the political fiasco over the Trident Weapons programme threatens Sterling sentiment. The focus today in terms of economic data will fall on the monthly jobless report, which is expected to show a further fall in unemployment from 2.9% in January. In addition, a separate gauge of the report will be watched closely as average hourly earnings are expected to remain largely unchanged in the first three months of 2007. The Bank of England have expressed concerns that wage growth will be the primary driver of inflation this year and therefore a rise in average earnings will increase the chances of another rate increase.

Data Released 14th March

UK 09:30 Average Earnings (3 months to January)

UK 09:30 Unemployment (February)

U.S 12:30 Current Account Balance (Q4)

U.S 12:30 Import / Export Prices (February)

written by Adam Solomon