Daily Insight

Despite the Bank of England's decision to keep UK interest rates unchanged last week, the Pound has managed to rebound sharply against the majors, increasing 0.6% versus the Dollar and 0.3% against the Euro following heightened speculation of further monetary tightening next month. With the housing market still showing gains in prices combined with above-trend inflation and increasing consumer optimism means that rates are likely to rise to 5.50% over the coming months. In addition, the Pound is also receiving support from the view that Japanese investors historically tend to invest their money abroad in search for higher yielding currencies at this time of year. In terms of economic data, Sterling has made further advances this morning as a report from the British Retail Consortium showed that UK retail sales rose at the fastest pace in 11 months in March. Home values have risen up to 10% over the past 12 months and the report this morning will only provide a further indication that optimism remains strong amongst the consumer despite borrowing costs being at the highest level in 5-years. A separate from the Nationwide building society has reiterated that confidence rose to the highest level in four months in March, which only conveys the message that the Bank of England have the capacity to continue raising interest rates. Elsewhere, the Pound may continue making gains this morning as the DCLG index on the UK housing market may show that prices continued to increase in February.

Initially, the Euro made rapid gains against the Dollar yesterday, increasing 0.6% versus the U.S currency to trade at the highest level in over two years as we build up to the ECB interest rate announcement and press conference this Thursday. The single currency also received a boost as German exports rose for the first time in four months in February while a separate showed that the French industrial production increased beyond expectations. Despite significantly higher borrowing costs, recent reports have provided a strong indication that growth will be able to sustain momentum this year exports rose 1.9% from January while French factory production increased 1.1%. The reports only emphasise that the Euro-zone economy will be able to supplement the slowdown in the U.S and maintain the fastest growth in nearly seven years.

The Dollar continued to fall sharply yesterday and reversed much of the gains made in the aftermath of the nonfarm payrolls data last week as tensions between the U.S and China intensified. A week earlier, the Dollar dropped rapidly on news that Washington planned to impose tariffs on China's subsidised paper industry and the situation escalated yesterday as the U.S complained to the World Trade Organisation, which prompted the Chinese to pull out of the G7 meeting this weekend. However, by the close of trading last night, the Dollar had rebounded from the lowest level in two years versus the Euro amid speculation that U.S policy makers will retain a tightening bias this evening. The focus today will inevitably fall on the minutes from the Federal Reserve's last policy meeting where the chairman, Ben Bernanke, may signal that policy makers are still focused on curbing inflation.

Data Released 11th April

UK 09:30 DCLG House Prices (February)

U.S 19:00 FOMC Minutes (March 20/21 Policy Meeting)

written by Adam Solomon