Daily Insight

Following on from last week, the U.S Dollar failed to consolidate on the initial gains made against the Euro and the Pound after a gauge of business activity showed an unexpected increase in consumer spending while a rising inflation reduces the prospect of a cut in interest rates over the coming months. The Personal income and expenditure report, which combines the Fed's preferred measure of U.S inflation, showed that growth in wages and employment gained 0.6% in February and may offset the negative impact of rising fuel prices and weakening home values. However, the Dollar came under further pressure against the majors, dropping to the lowest level in a week versus the Euro after the U.S decided to apply new tariffs on imports from China. The Dollar weakened as speculation mounted that the move would reduce trade flow with the world's largest holder of foreign reserves while the escalated tension in the Middle East also prompted a Dollar sell-off. There is a host of significant economic data released in the States this week, which should provide a further insight into Dollar sentiment with the focus falling on the March non-farm payrolls report. Despite the fact that Friday will be a market holiday, the monthly U.S job report is expected to show that the economy added 135,000 jobs to payrolls last month with the unemployment rate rising to 4.6%. The Dollar may weaken further this afternoon with an industry report expected to show that the headline measure of U.S manufacturing declined to a reading of 51 in March as the slowdown in residential housing investment is likely to weigh on output.

The positive sentiment surrounding the Euro continued on Friday after a host of economic reports supported the prospect of further monetary tightening in the Euro-zone. The EC sentiment index showed that confidence in the European economy unexpectedly rose to highest level in six years in March as unemployment fell to a record low at 7.3%. The reports indicate that economic growth, which accelerated to the fastest pace in six years in 2006, will be able to sustain that momentum this year and with inflation edging towards the Bank's 2.0% target, we can expect another rise in interest rates over the coming months. In terms of economic data, the Euro may stay broadly unchanged against the majors as the Purchasing Manager's index into European manufacturing is expected to remain at an elevated level in March with a reading above 50 indicating growth. Following the robust rebound in European confidence last month combined with record low unemployment, the February report on retail growth may show that sales bounced back from a 1.0% drop in January. Elsewhere, the market will be paying particular attention to comments from a number of ECB officials this week as we look for some direction on future policy with next scheduled rate announcement after Easter.

The Pound has managed to make robust gains against the majors over the past trading session despite the added tension and nervousness in the market following the escalating tension in the Middle East, which has sent oil prices surging to the highest level in six months. The focus this week will undoubtedly fall on the Bank of England rate announcement this Thursday and a further rise in UK rates cannot be ruled out after inflation rose to 2.8% in February while the RPI index increased to the highest level in 15-years. Further evidence of mounting price pressures are expected to be highlighted in the data released prior to the announcement with the headline measure of UK manufacturing expected to remain near the yearly highs in February. Higher inflation has encouraged manufacturers to increase prices and with service sector growth holding steady at 3.8% later this week, there is little hope of pricing pressures moderating. In addition, consumer sentiment has remained strong over the past month, which has reverberated through to UK retail growth and therefore, the Bank of England have plenty of scope to raise interest rates early this month. However, the consensus still suggests that the Monetary Policy Committee will hold interest rates steady at 5.25% and that may weigh on Sterling sentiment.

Data Released 2nd April

UK 09:30 CIPS Manufacturing Survey (March)

EU 09:00 PMI Manufacturing (March)

U.S 15:00 ISM Manufacturing (March)

written by Adam Solomon