Daily Insight

Following on from last week, the Dollar relinquished much of the earlier gains against the majors on Friday as the advanced estimate of U.S gross domestic product showed that the economy grew at the slowest pace in four years in the first quarter. The report from the Commerce department confirmed an annual growth rate of 1.3% in the first three months of the year, which was significantly slower than expected following the dismal performance of the housing market and the ever-widening trade deficit. The primary driver of economic expansion has been consumer spending while a separate gauge of the report showed that a measure of inflation rose at a faster pace. Therefore, the focus today will undoubtedly fall on the personal income and expenditure report, which is expected to confirm that the Fed's preferred gauge of inflation rose at an annual rate of 2.2% in March. The renewed risks to price stability have been sourced to a jump in oil prices over the last quarter and with inflationary pressures still a concern to policy makers, it is unlikely that U.S interest rates will be cut in the short-to-medium term. Elsewhere, the Dollar may come under pressure later this afternoon as a report on the U.S manufacturing sector is expected to provide the first insight into activity at the start of the second quarter. The Purchasing Manager's index is forecast to slow dramatically in April to a reading of 54.5 from 61.7 the previous month and the report will provide further evidence that the U.S slowdown is showing few signs of peaking.

In contrast to the U.S economy, economic growth in the Euro-zone has been gathering momentum this year despite higher interest rates, a strengthening Euro and the introduction of the German VAT increase at the start of the year. The Euro rose to equal a record high against the Dollar last week and has also been making steady gains against the Pound despite the fundamental lack of economic reports released. The single currency may continue that trend at the start of May as a barrage of economic reports increase the chances of further monetary tightening in the Euro-region. The EC sentiment index is expected to show that consumer and business confidence, which has been strengthening since early 2003, continued to rise in April as unemployment fell to a record low. As a result, the report will further strengthen the case of higher interest rates although a strong Euro will remain a concern to policy makers as the U.S slowdown continues to hamper Euro-zone export growth. Elsewhere, the Euro may struggle to consolidate on the recent gains as the Flash estimate of consumer prices is expected to show that inflation moderated from 1.9% to 1.8% in April.

Over the past couple of weeks, the Pound has increased to highest level against the Dollar since June 1981 as a report showed that UK inflation rose to a decade high in March and forced the governor of the BoE to write a letter of explanation to the Chancellor. Combined with the minutes from the Central Bank's last policy meeting, which showed two members of the committee recommended a further quarter-point hike in April, the chances of May interest rate rise has been completely factored into current market movement. The National Institute of Economic and Social Research has recently said that UK inflation will exceed the government's 2.0% target for another year because the BoE cut interest rates too far in 2005. The report also said that consumer price inflation will average 3.0% over the next quarter and stay above the 2.0% target until the second quarter of 2008. The Central Bank's current approach to tackling inflation focuses solely on keeping consumer prices in check and doesn't to take into account rising asset values, money supply and credit growth. In terms of economic data, the Pound has suffered mixed fortunes this morning as UK house prices increased by the most in four years in April according to the survey from Hometrack Ltd. Prices rose 0.7% on the month, which suggests that the property market has continued to expand despite higher interest rates while elsewhere, a gauge of consumer confidence declined over the same period, reflecting the fragile state of many household finances.

Data Released 30th April

UK 09:30 GFK Consumer Confidence (April)

EU 10:00 Flash HICP (April)

EU 10:00 EC Business Climate Index (April)

EU 10:00 EC Sentiment Index (April)

- Consumer / Industrial Sentiment

U.S 13:30 Personal Income / Expenditure (March)

- Core PCE

U.S 14:45 Chicago PMI (April)

U.S 15:00 Construction Spending (March)

written by Adam Solomon