Daily Insight

The Pound's recent resolve was tested yesterday as the UK currency fell for the first time in seven days, dropping 0.3% versus the Dollar after achieving a 26-year high earlier this week. A slump in global shares has seemingly prompted investors to unwind UK carry trades, which has sent the Pound trading lower, ending the longest winning streak since November last year. Recent economic reports have fuelled speculation that UK interest rates will continue to rise over the coming months as wage growth combined with higher inflation threatens the pace of economic expansion. However, the Pound dipped yesterday as investors shunned high-yielding currencies after equity markets in Europe and Asia slid and many economists have speculated that the Pound is now looking overly-stretched at the current levels. Sterling has gained 10% against the Dollar in the past year alone and this week we broke the $2.00 barrier for the first time since September 1992. Historically, the Pound has come under severe pressure in the months that follow a break above this level and therefore we have advised any Dollar buyer's to take advantage of the current price or at least place a stop order in the market. In terms of economic data, the Pound may remain fairly strong this morning as a report on UK retail growth may show that sales increased 0.5% in March while the annual pace may decline to 4.7% from 4.9% the previous month.

The Euro continued to rise against the Dollar yesterday, pushing towards the highest level in history at 1.3640 while the single currency also made widespread gains against Sterling despite the apparent lack of economic data released in the Euro-zone. German producer price inflation, which provides an indication of price pressures on the economy, slowed to the lowest level in over two years in March following the abrupt drop in oil prices over the same period. Producer prices increased 2.5% year-on-year last month, which represents the lowest reading since September 2004 and with the price of oil dropping 18% in just eight months, inflationary pressures have seemingly moderated in the 13-nations sharing the Euro. In addition, a report earlier this week has showed that consumer price inflation has remained below the ECB's 2.0% ceiling for the past seven months in succession but policy makers have retained a tightening bias and we fully anticipate Euro-zone interest rates to increase to 4.00% by June.

The Dollar managed to claw back some modest gains against the Pound yesterday but fell to a fresh two-year low versus the Euro as an index of U.S leading economic indicators rose for the first time in three months in March. The reports provides an insight into the future course of the U.S economy as the labour market continues to be the prime source of growth and factory orders increased beyond expectations. Elsewhere, a separate report showed that initial jobless claims fell to 318,000 in March from 335,000 the previous month but the latest report from the Labour Department has showed that the number of people out of work and claiming benefits actually fell less than forecast. The report provides the first indication of a softening in the U.S labour market as the figures show that employers are cutting workforces amid the sustained slump in housing and manufacturing sectors.

UK 09:30 Retail Sales (March)

written by Adam Solomon