Daily Insight

The Pound continued to rise against both the Euro and the Dollar yesterday, trading close to a six-week high versus the U.S currency following a report from the UK Treasury, which announced that a plan was in effect to allow British multi-nationals to repatriate billions of foreign profits tax free. The Pound continued to make gains for the second consecutive session on speculation that the proposal would have a similar effect to the U.S Homeland Investment Act. The law gave U.S companies the scope to return foreign profit at a discounted tax rate and thusly boosted the Dollar 10% against the Pound in 2005. Elsewhere, Sterling received an additional boost as a report from the British retail consortium showed that sales registered the best reading in 11-months in March. Therefore, despite the recent slowdown in the manufacturing sector, the BoE are likely to continue monetary tightening in May with house prices rising 10% year-on-year in the first quarter while consumer demand shows no signs of slowing. In addition, a separate report yesterday from the International Monetary Fund suggested that a further quarter-point rise would be necessary in order to rein in inflation as the economy continues to grow at the fastest pace in over two-years. In terms of economic data, the Pound may come under some moderate pressure this morning as the UK trade balance is expected to show that the deficit in goods and services expanded to £6.4 billion in February following the slowdown in manufacturing.

The Dollar continued to fall against Sterling yesterday but remained largely unchanged versus the Euro amid tension caused by the release of the minutes from the Federal Reserve's last policy. A number of members of the Fed's policy setting council are due to speak this week and express heightened concerns over rising inflationary pressures while growth in the economy continues to slow. That sentiment was echoed by the International Monetary Fund yesterday as they cut their forecast for U.S economic growth by almost a full percentage point, saying that the sustained weakness in the housing market would continue to hamper expansion. The U.S economy is expected to grow 2.2% this year, which represents the weakest in five years compared with initial estimates of 2.9% just seven months ago. In terms of economic data, the Dollar may come under further pressure this afternoon as U.S import prices are expected to rise 0.6%, which may increase the gap in goods and services.

The Euro remained largely unchanged against the majors yesterday amid a sparse supply of economic data released in the Euro-zone as we build up to the ECB interest rate announcement this afternoon. The French trade deficit showed little improvement from the previous month as exports rose while imports also increased following a significant rise in energy costs. With the impending French presidential election, the focus has been largely focused on the problems caused by the strengthening Euro and the projected impact on Euro-zone exports, which accounts for a large percentage of economic growth. Therefore, the focus will fall heavily on the ECB press conference tomorrow afternoon where the chairman, Jean-Claude Trichet, may temper his hawkish rhetoric as the political pressure builds on the European monetary policy committee. If Trichet uses a softer tone and language in his accompanying statement, the Euro may come under significant pressure as the market anticipates the term "strong vigilance" to signal a likely rate hike in May. In terms of economic data, the Euro may remain fairly strong in the build up to the announcement as the final estimate of GDP is expected to stay unchanged at 3.3% in the fourth quarter. While a separate report may show that European industrial production increased 0.2% in February, taking the annual growth rate up to 4.1% following a rise in factory output over the same period.

Data Released 12th April

U.S 13:30 Export Prices (March)

- Import Prices

U.S 13:30 Initial Jobless Claims (w/e 7th April)

written by Adam Solomon