Daily Insight

The Pound advanced yesterday and made significant gains against the majors, firming 1.0% versus the Dollar and a further 0.9% against the Euro as UK inflation unexpectedly accelerated in February to the second fastest pace in over 10-years. Consumer prices rose slightly above expectations at 2.8% year-on-year last month while retail price inflation accelerated to a 15-year high at 4.6% and the data yesterday will only reinforce the likelihood of a further rise in UK interest rates either in April or May. Higher wage demands combined with sustained growth in the UK property market may force the MPC to raise rates early in April by a further 25 basis points to peak at 5.50%. The minutes from the Bank of England's last policy meeting will take centre stage this morning after the 9-strong committee elected to hold UK interest rates in March and the report this morning will provide an insight into future monetary policy. It is widely anticipated that the MPC voted 7-2 in favour of keeping rates on hold with the two dissenters recommending a further quarter-point rise. However, if any more members elected to shift their stance towards a further rise in interest rates, we can expect the Pound to make widespread gains against both the Euro and the Dollar. In addition, the tone and language used in the accompanying statement will be heavily scrutinized as the market looks for direction on policy and the chances of a further hike next month.

The Pound may also receive a boost as a report from the Confederation of British Industry is expected to show that industrial orders remained at the highest level in a decade for the month of March, which will support the view that growth in manufacturing will be able to support economic growth. Elsewhere, the Chancellor Gordon Brown will deliver what will probably be his final budget at midday today and may borrow a further £6 billion more than he forecast just four months ago in order to fund plans for health and education spending. Therefore, the government's deficit may total £101 billion in the three fiscal years through to April 2009 and we can expect some volatility in the market during the announcement.

The Dollar continued to decline against the Pound yesterday and remained flat versus the Euro despite a positive economic report, which seemed to suggest that the slump in housing may have peaked. Builders started work on more new homes in the States that previously anticipated with housing starts rising to an annual rate of 1.525 million in February, which was an increase of 9% from January. The report yesterday will ease concerns that a worsening construction slump would weigh on economic growth as housing starts rebound from the slowest pace since 1997. However, the focus today will fall on the FOMC rate announcement this evening where the Federal Reserve are expected to keep interest rates on hold at 5.25%. The tone of the accompanying statement will also be closely watched as the Open Market Committee are expected to retain a tightening bias and that may provide a boost to the ailing U.S dollar.

Data Released 21st March

UK 09:30 BoE MPC Minutes: March 7th - 8th Meeting

UK 11:00 CBI Industrial Trends Survey (March)

UK 12:30 Budget Report

U.S 18:15 FOMC Rate Announcement

written by Adam Solomon