Daily Insight

Initially, the Pound declined 0.2% against the Euro yesterday and also dropped modestly versus the U.S Dollar following the release of the minutes from the Bank of England's last policy meeting, which all but diminished the prospect of a further rate rise in the near-term. The monetary policy committee voted 8-1 in favour of keeping interest rates on hold at 5.25% with David Blanchflower unexpectedly supporting a cut. Despite recent evidence to suggest that retail price inflation has accelerated to a 15-year high in February, Blanchflower argued in the statement yesterday that there is spare capacity in the labour market to reduce interest rates to 5.0%. The Pound came under renewed pressure as the report was expected to show that the dissenters favoured a rise in rates as appose to a cut. However, higher wage demands combined with the sustained growth in property prices means that the Central Bank are still likely to lift interest rates in the medium term with the next likely move in May or June. Elsewhere, a separate report yesterday provided some support to Sterling as UK manufacturing orders and factory price expectations rose to the highest level in 12 years in March. The report from the Confederation of British Industry showed that new orders climbed to the highest reading since May 1995 and the index will support the BoE's view that growth in manufacturing can support economic expansion this year.

The Euro failed to take advantage of any Sterling weakness yesterday but managed to advance 0.4% versus the Dollar despite a fundamental lack of economic data released in the Euro-zone. However, the chairman of the European Central Bank, Jean-Claude Trichet, testified to the EU Parliament yesterday but failed to give any further insights into future monetary policy and only reiterated the cautious tone of his last statement. Following a seventh interest rise in little over a year this month, Trichet reiterated that the Central Bank will continue to monitor all risks to price stability but didn't give a clear insight as to when policy makers may lift rates again. The Euro has remained largely unchanged versus the majors this morning as a report showed that industrial orders came in as expected in January.

The Dollar has fallen to lowest level against the Euro since March 2005 over the past trading session and has also dropped to a six-week low versus the Pound as the Federal Reserve kept U.S interest rates on hold at 5.25%. It was widely anticipated that policy makers would leave rates unchanged but the accompanying statement showed that the Central Bank has removed a reference to additional firming in monetary policy. The shift in tone and language of the statement obviously weighed heavily on Dollar sentiment as the Fed dropped its tightening bias for the first time and gave an indication that policy makers are less optimistic on the outlook for the U.S economy. With severe slumps in housing and manufacturing weighing on economic growth, the Fed have seemingly given themselves a platform to begin cutting U.S interest rates in the second half of the year. In terms of economic data, the Dollar may continue to decline as the weekly jobless claims are expected to rise from 318,000 in the week ending 17th March.

Data Released 22nd March

UK 09:30 Retail Sales (February)

EU 10:00 Industrial Orders (January)

U.S 12:30 Initial Jobless Claims (w/e 17th March)

U.S 14:00 Leading Indicators (February)

written by Adam Solomon