Daily Insight

The Dollar came under renewed pressure against the majors yesterday, dropping to the lowest level in well over two years versus the Euro while also declining to a fresh eight-week low against the Pound despite a seemingly hawkish report from the Federal Reserve. The minutes from the last FOMC rate announcement showed that policy makers altered the tone and language used in the accompanying statement, which indicated that the Central Bank have revised their forecasts over moderating inflationary concerns. The report has revived the prospect of further monetary tightening in the States despite the worst slump in housing in over 17-years but with inflation rising to a five-month high in February, the Fed may need to continue raising interest rates even as the economy slows. However, the Dollar failed to capitalise and continued to fall against both the Euro and the Pound yesterday, closing last night above 1.9800 for the first time in 7-weeks. Separate reports from the labour department did little to boost sentiment as import prices rose by the most since May last year ahead of the of the U.S trade data this afternoon. Following the renewed uncertainty surrounding relations between China and the U.S, the trade balance will come under further scrutiny over the coming months. The report this afternoon is expected to show that the deficit between goods and services rose above $60 Billion in February while China has reported this week that its trade surplus almost doubled in the first quarter from a year earlier.

Prior to the ECB interest rate announcement, the Euro made widespread gains against the majors but slipped 0.2% versus the Pound as the accompanying press conference diminished the prospect of a further quarter-point hike in May. The chairman of the European Central Bank, Jean-Claude Trichet, gave a strong indication that interest rates will continue to rise from the current 3.75%, saying that the governing council would act in a "firm and timely manner". The ECB will continue to monitor all risks to price stability but the omission of the term "strong vigilance" from the statement dispelled any chance of a rate increase next month. However, the tone of the press conference remained hawkish on inflation and therefore the ECB may continue lifting rates beyond 4.0% in June as the economy shows few sings of cooling after expanding at the fastest pace in two years. In terms of economic data, the Euro managed to remain relatively unchanged against both the Pound and the Dollar as the final estimate of Euro-zone GDP came out in line with expectations while Italian industrial production declined for a second month in succession. The European economy relies heavily on export growth and factory output and considering the underlying strength of the Euro is seemingly having a negative effect on export growth, the political pressures from France and Italy may have an influence on the timing of the next rate increase.

The positive sentiment surrounding the Pound continued yesterday as the single currency managed to make modest gains against both the Euro and the Dollar despite a worse-than-expected report on the UK trade balance. The deficit in goods and services rose more than anticipated in February, widening to £6.8 billion and the report provides further evidence that a strong Pound is having a negative impact on UK exporters. The UK currency has increased 13% versus the Dollar in the past year and that has led exports to fall to the lowest level in 18-months while a separate report from the BCC showed that manufacturers are struggling to raise prices. The British Chamber of Commerce has blamed the Bank of England's decision to raise interest rates three times since August as the primary reason for a lacklustre performance over the past quarter. Elsewhere, the Pound has received a further boost as a report from the Royal Institute of Chartered Surveyors has showed that house price inflation unexpectedly quickened in March after easing in the previous four months.

Data Released 13th April

U.S 13:30 Trade Balance (February)

U.S 13:30 Producer Price Index (March)

- Ex Food & Energy

U.S 15:00 Michigan Sentiment (April Prelim)

written by Adam Solomon