Daily Insight

The Pound came under renewed pressure against the majors yesterday, dropping 0.5% versus the Dollar to close under the $2.0000 barrier for the first time in a week while Sterling also fell considerably against the Euro. Following another round of seemingly positive economic data, the Pound retraced back towards the major support level at 1.9875 and a clean break below that level is likely to see further downside movement. The UK currency failed to find some support despite a stronger-than-expected report on the property market as UK house prices rose that the fastest pace in four months in April. The average cost of a home increased 0.9% on the month despite initial forecasts projecting a 0.6% decrease and the report emphasised that demand remains high with the market weathering the highest borrowing rate in nearly six-years. House prices rose a staggering 10.2% from a year earlier and combined with faster-than-expected economic growth in the first quarter, the Bank of England have the scope to continue raising interest rates this year. However, the adverse reaction of the Pound yesterday in spite of the positive data yesterday suggests that the movement is largely technical after Sterling rallied to the highest level against the Dollar since June 1981 following the inflation report last week.

The Euro came within a whisker of touching the all-time high against the Dollar this week but retraced back to test the support at 1.3600 yesterday, dropping 0.3% on the session while the single currency also made robust gains versus the Pound. The positive sentiment surrounding the Euro is likely to continue over the coming weeks as a number of ECB governing council members have expressed concerns over the current risks to price stability and have paved the way for another rate increase in June. The Euro rose against Sterling as a report in Germany showed that a gauge of consumer confidence rose by more than expected in May as the index rose to a reading of 5.5 from 4.4 in April. The German government has also raised its economic growth forecast this week, saying that the economy will expand 2.3% this year from initial expectations of 1.7% and the report provides a further indication that the German economy is in the midst of a strong upswing. Record low unemployment is likely to continue to improve consumer sentiment despite the introduction of the value-added tax increase at the start of the year.

The Dollar managed to claw back some significant gains against Sterling yesterday, climbing 0.6% by the close of trading as we look to test the trend support at the crucial 1.9875 level. In last week, the U.S currency has declined to lowest level in over 25-years versus the Pound and on Wednesday fell to a near-record low against the Euro but from a technical perspective, the market was looking increasingly 'over-bought' and a retracement back was always inevitable. In terms of economic data, the Dollar may struggle to consolidate the gains made against the majors as the advanced estimate of U.S GDP is expected to show that economic growth slowed in the first quarter. The report may show that economy grew at the slowest pace in over a year in the first three months of 2007, led by the sustained slump in housing and business investment. Gross domestic product, the value of all goods and services, is expected to rise to an annual rate of 1.8% from 2.5% in the fourth quarter, the weakest since late 2005. The Federal Reserve has recently estimated that the U.S economy will perform at a moderate pace this year with consumer spending driving expansion as a slowdown in manufacturing and real estate shows few sings of abating. Therefore, the focus today will fall largely on the final estimate of the Michigan sentiment, which is expected to show that consumer confidence declined for a third month in April led by an increase in fuel prices over the same period.

Data Released 27th April

U.S 13:30 Advance GDP (Q1)

- Deflator / Core PCE

U.S 15:00 Michigan Sentiment (April Final)

written by Adam Solomon