Daily Insight

Following on from last week, the Pound increased to the highest level versus the Dollar since June 1981 after a string of economic reports showed that UK inflation has accelerated to the fastest pace in a decade, fuelling speculation that the Bank of England will continue raising interest rates in May and beyond. The minutes from the Bank of England's last policy meeting showed that two members of the nine-strong committee voted in favour of a rate hike in April and that only increases the prospect of quarter-point rise in May. As a result, the Pound managed to consolidate against the Dollar, closing above the major support at $2.0000 but the sharp reversal that ensued has led to speculation that the Sterling rally may have peaked. In terms of economic data, the Pound remained fairly strong towards the end of the week as UK retail sales rose for the second month in succession in March. Sales increased 0.3% after a revised 1.6% rise in February and the report will only provide a further indication that higher interest rates have done little to dampen consumer spending. There is a sparse supply of economic data released in the UK this week but the preliminary estimate for gross domestic product is expected to show that the UK economy slowed in the first quarter after interest rates rose to highest level in 5-years.

The positive sentiment surrounding the Euro continued last week as the single currency increased to a near record high versus the U.S Dollar and managed to claw back some significant gains against the Pound by the close of trading on Friday. The Euros advance increased in momentum despite German producer price inflation slowing to the lowest level in over two years in March following the sudden drop in oil prices over the same period. The gauge of producer prices gave an indication that inflationary pressures within Europe's largest economy have moderated over the past month although we fully expect the ECB to retain a tightening bias and increase interest rates in June. There is a sparse supply of economic data released in the Euro-region this week with the focus falling on the German industrial sector. The Ifo business climate index for April is expected to increase modestly to a reading of 107.8 from 107.7 in March, not far short of December's record high. Elsewhere, the Euro may receive further support from the preliminary German CPI figures, which are expected to show that core inflation remains a concern to policy makers.

The Dollar has been in rapid decline over the past week, falling to the lowest level in 25-years versus the Pound and approaching a near-record low against the Euro as the dramatic slump in housing and manufacturing threatens the pace of economic expansion. The U.S formally has a "strong Dollar" policy and the U.S treasury secretary, Hank Paulson, came out in support of the ailing currency towards the end of last week, which did provide some initial support to the Dollar. There is a host of significant economic indicators released this week with the focus falling on the U.S housing market with both existing and new home sales expected to show that the sector remains depressed. The dramatic slump in housing has been the primary reason for economic growth slowing to such a degree and the advanced gauge of U.S GDP should confirm that the economy was expanding well below trend growth in the first quarter. Elsewhere, the Dollar may come under further pressure as a report on U.S consumer confidence is expected to show that sentiment fell dramatically to a reading of 105.0 from 107.2 in April, partly as a result of high fuel prices.

Data Released 23rd April

UK 09:30 PSNCR (March)

written by Adam Solomon