Daily Insight

Following on from last week, the Dollar managed to bounce back against the Euro and the Pound on Friday following the release of the monthly U.S job report, which showed that the economy added more jobs to payrolls than anticipated in March. Recent reports have provided some optimism that a strengthening labour market will offset the slumps in housing and manufacturing this year as non farm payrolls increased 180,000 while the jobless rate actually fell to 4.4%. The unexpected increase in employment combined with higher wage demands is providing a boost to consumer spending, which accounts for over a third of economic growth and is preventing the housing recession from spreading to other parts of the economy. Prior to the report, the Dollar was struggling against the Pound and the Euro but revisions to the previous two months showed that employers had added 32,000 more jobs than previously estimated. Elsewhere, average hourly earnings rose 0.3%, which provides an indication that inflationary pressures remain a factor and is likely to keep the Federal Reserve on red alert. Despite making rapid gains against the majors, the Dollar has fallen this morning after a U.S government report said it will file official complaints against China, raising concerns that the dispute over trade will escalate and slow growth in both economies.

The Euro managed to claw back some significant gains against the Pound towards the end of the week and also rose to the highest level in nearly two years versus the Dollar following a host of significant economic reports. The Purchasing Manager's index showed that growth in European service industries expanded at close to the fastest pace in six months in March. Consumer optimism has rebounded sharply in Europe with confidence rising to a six-year high following the imposed sales tax increase in Germany at the start of the year while unemployment has fallen to a record low. Therefore, it seems that service sector growth will be able to support economic expansion this year with growth expected to reach the fastest pace in a decade. As a result, we expect the European Central Bank to continue monetary tightening this year after raising interest rates seven times since late 2005. However, the ECB will probably hold rates at 3.75% on Thursday this week with attention switching to the accompanying press conference for clues on future policy. The chairman, Jean-Claude Trichet, has notoriously used a specific tone and language when delivering his statement and the market will be looking for the term, "strong vigilance" in order to start pricing in a likely rate hike in May.

The Pound came under considerable pressure last week following the Bank of England's decision to hold interest rates steady at 5.25% with policy makers choosing to ascertain the impact of three previous rate increases before a likely move in May. The Pound had made widespread gains against most of the high-yielding currencies in the build up to the announcement after economists priced in a slim chance that the MPC could move early in April with retail price inflation currently at the highest level in 15-years. As a result, the Pound declined after the committee elected to keep rates unchanged but with house prices accelerating to the fastest pace in over two years in the first quarter combined with robust growth in UK service industries, the BoE may need to increase rates for a fourth time next month. Elsewhere, the Pound came under further pressure as a separate report from the National Institute of Economic and Social Research said that UK growth slowed in the first quarter. Gross domestic product rose 0.5% down from 0.7% in the three months through December but the report also highlighted that the economy should expand fast enough to warrant a further quarter-rate increase this year.

Date Released 10th April

Nothing of Significance

written by Adam Solomon