Daily Insight

The Pound surged forward against the Dollar yesterday, rising to the highest level since September 1992 as we breached the $2 barrier for the first time since 'Black Wednesday'. The move was driven by contrasting inflation data as UK consumer price inflation accelerated to the fastest pace in a decade in March, which means that the governor of the Bank of England, Mervyn King, will be forced to write a public letter of explanation to the Chancellor. Consumer prices unexpectedly rose 3.1% over the past month as we continue to deviate from the government's 2.0% target and that will surely prompt the BoE to lift interest rates aggressively over the coming months. After inflation accelerated to such a degree, the market has now fully priced in a projected rate hike next month while speculation intensifies that the MPC may need to consider back-to-back increases in May and in June. In stark contrast, a report on U.S consumer inflation showed that core prices rose less than forecast in March and supports the Fed's view that inflation will subside as the economy slows.

Over the past month, Mervyn King has stated that he remains determined to contain inflation and the surge yesterday marked the first time that the Central Bank missed the 2.0% target by more than a percentage point since taking control of monetary policy in 1997. The Pound has continued to advance overnight and it seems increasingly likely that we will test the resistance at 2.0105 after closing last night at the highest level since Sterling was ejected from the European exchange rate mechanism in 1992. The focus this morning will fall on the minutes from the Bank of England's last policy meeting where the MPC elected to hold UK rates at 5.25%. Therefore, it will be interesting to gauge how the nine-strong committee voted in April and it is possible that there may be a three-way split with David Blanchflower expected to maintain his stance for a cut. Nevertheless, the Pound will be further underpinned by strong growth in the UK labour market with unemployment expected to remain unchanged at 2.9%.

The Euro managed to advance 0.3% against the Dollar yesterday but came under significant pressure versus a resurgent Pound as we fell towards the lowest level since late January in the aftermath of the UK inflation data. The single currency failed to prevent the fall despite yet another positive economic report from Germany where investor confidence rose the highest level in 10-months in April. The ZEW index showed that investor and analyst expectations increased to a reading of 16.5 this month, the highest since June last year and provides a further indication that growth in the economy is accelerating. Elsewhere, a separate report showed that Europe's trade balance increased to a surplus of €200 million for the month of February and the reports point to the need for further monetary tightening over the months. The market has factored in a 100% chance of an interest rate rise in June and recent report have suggested that the ECB's governing council will need to lift rates beyond 4.0%.

Data Released 18th April

UK 09:30 BoE MPC Minutes - April Meeting

UK 09:30 Claimant Count/Unemployment Rate (March)

UK 09:30 Average Hourly Earnings (3 months to February)

written by Adam Solomon