Daily Insight

The recent positive momentum surrounding the Dollar continued yesterday as the U.S currency rose a further 0.2% against the Pound while also making modest gains versus the Euro amid the release of the minutes from the Federal Reserve's last policy-setting meeting. The chairman of the Fed, Ben Bernanke, released a statement last night, which seemed to suggest that policy makers are concerned over the effects of the housing recession in terms of economic growth while inflation still remains elevated. The FOMC left their benchmark interest rate unchanged at 5.25% on the 9th May and have seemingly adopted a neutral stance on monetary policy with Fed officials anticipating that economic growth will rebound in the second half of the year. A separate report yesterday from ADP employer services showed that U.S companies had added 97,000 jobs in May, which increased significantly from the previous month and provides an insight into the nonfarm payrolls report tomorrow. The Dollar may come under some pressure against the majors this afternoon amid a host of economic data with the focus falling on the revised estimate of U.S gross domestic product. The report is expected to show that economic growth, which has already slowed to the weakest level in four years, will be revised even lower as the U.S trade deficit continued to widen in the first three months of the year.

The Euro managed to consolidate on the recent gains made against the Pound yesterday but continued to the downward momentum versus the Dollar following a surprisingly negative report on European retail growth. Sales fell for the first time in three months in May as the index dropped to a reading of 48.4, a four month low, from 54.6 in April. The report provides an indication that rising interest rates combined with the introduction of the German VAT increase at the start of year are beginning to weigh heavily on consumer sentiment. In addition, the figures yesterday add to recent economic indicators, which have shown that the European economy, which has been expanding at the fastest pace in seven years, may have reached its peak. Elsewhere, the Euro did receive some support as ECB governing council member, Nicholas Garganas, said in an interview yesterday that the Central Bank would probably raise its inflation expectations next month and may raise interest rates beyond June. Therefore, the focus today will fall on the EC sentiment indices for business and consumer confidence, which are expected to remain at levels consistent with a robust pace of growth after achieving a six-year high in April.

The Pound declined for the second consecutive day yesterday, dropping modestly versus the Euro and the Dollar following a distinct lack of economic data released in the UK. The Pound has continued that trend this morning as a report from the Nationwide Building Society showed that UK house prices rose at a slower pace in May. The report provides an indication that property price inflation may have peaked after interest rates rose to a six-year high this month. The average cost of a home rose just 0.5% to £181,584 in May following an aggressive 0.9% increase the previous month and it seems increasingly likely that higher borrowing costs are beginning to slow the housing market. In terms of economic data, the Pound may continue to decline this morning as a report from the Bank of England is expected to show a modest drop in UK mortgage approvals last month. Elsewhere, a gauge of consumer sentiment may remain unchanged this month while the confederation of British Industry are expected to report a large drop in the distributive trades survey.

Data Released 31st April

UK 09:30 Mortgage Approvals BoE (April)

UK 09:30 Consumer Sentiment (May)

UK 11:00 CBI Distributive Trades Survey (May)

EU 10:00 Flash HICP (May)

EU 10:00 EC Sentiment Index (May)

- Industrial / Consumer Confidence

U.S 13:30 GBP / Deflator (Q1 Revised)

U.S 13:30 Initial Jobless Claims (w/e 26th May)

U.S 14:45 Chicago PMI (May)

U.S 15:00 Construction Spending (April)

written by Adam Solomon