Daily Insight

The positive sentiment surrounding the Pound continued yesterday as the UK currency rose to the highest level against the Dollar in two months and also climbed 0.3% versus the Euro amid speculation that the Bank of England could surprise the market with a further quarter-point rate increase this week. Following a significant rise in retail price inflation over the past month combined with growth in the service sector and consumer spending. which has sparked widespread speculation that the MPC will lift interest rates beyond 5.25% in April. However, the committee voted 8-1 in favour of holding interest rates steady in March with the one dissenter, David Blanchflower, favouring a cut amid sustained growth in the labour market. Therefore, it remains likely that the Central Bank will wait for further evidence of slowing inflation and look to analyse the impact of three previous rate hikes since August last year. As a result, the Pound may come under significant pressure if interest rates remain on hold this Thursday and therefore Euro and Dollar buyers would be well advised to place a stop order in the market to protect against adverse movement. The Pound also received a boost yesterday following a report from the Bank of England, which showed a sharp rise in UK mortgage equity withdrawal in the fourth quarter of 2006. The report showed that Britons borrowed the most against the value of their homes in nearly three years and provides further evidence that surging property prices are supporting consumer spending. Elsewhere, the Pound also managed to remain firm despite a report on the UK manufacturing, which suggested that growth in the sector unexpectedly slowed in March.

The Euro rose modestly against the Dollar yesterday but came under further pressure versus the Pound following the release of the Purchasing Manager's index, which showed that growth in European manufacturing unexpectedly slowed in March. Following the slowdown of economic growth in the U.S, exports out of the Euro-zone have been severely reduced while the tax increase in Germany has hampered consumer spending in the first quarter. The PMI index fell to a reading of 55.4 last month, the lowest in over a year, although a figure above 50 indicates expansion. However, the likelihood of persistent softness in Euro-zone manufacturing over the coming months is unlikely to affect monetary policy with the ECB expected to raise interest rates up to three more times this year. In terms of economic data, the Euro may continue to struggle against Sterling today as an index of inflation is expected to show that producer prices fell to 2.8% year-on-year in February from 2.9% the previous month.

The Dollar eased 0.1% against the Euro yesterday and fell significantly versus the Pound after a survey from the Institute of Supply and Management showed that growth in manufacturing slowed in March while an index of costs rose to the highest level since August. The sustained weakness in the housing sector and auto demand has reined in factory production as the index fell to a reading of 50.9 from 52.3 in February. The drop in manufacturing falls in line with a separate report from the Commerce department last week, which showed that durable goods orders fell for a second month in succession in February, reflecting companies reluctance to buy new equipment until inventories are reduced further. As a result, the negative sentiment surrounding the Dollar continued and we can expect further weakness this afternoon following a report on the U.S housing market. The slump in housing and construction looks set to weigh on economic expansion this year with pending home sales expected to fall 1.6% to a reading of 107.0 in February.

Data Released 3rd April

EU 10:00 Producer Price Index (February)

U.S 15:00 Pending Home Sales (February)

written by Adam Solomon