Daily Insight

The Dollar came under renewed pressure against the majors yesterday, dropping 0.2% versus the Euro and the Pound as the U.S currency struggled to consolidate on the earlier gains following a band of weak economic reports. Firstly, the PCE price index, which represents the Federal Reserve's preferred measure of U.S inflation, came in lower than anticipated in March while a survey of Business activity in the Chicago region unexpectedly slowed. U.S personal spending also rose less than initial forecasts in March, which provides an indication that higher fuel prices and the sustained slump in housing will continue to weigh heavily on economic expansion. Consumer spending, which accounts for two thirds of the economy, only rose 0.3% from a month earlier, falling by the most since September 2005 while a gauge of inflation remained unchanged. The report provided further evidence that the U.S economy has become overly reliant on the consumer and increased the prospect of a cut in interest rates over the coming months. Elsewhere, the Dollar continued to decline, dropping close to the record low against the Euro and also trading back above the $2.00 level versus the Pound as a measure of business activity fell dramatically from the highest level in two years. The report should provide some insight into the ISM manufacturing numbers this afternoon as factory production is likely to remain unchanged in April with a figure above 50 indicating expansion.

The Euro managed to make modest gains against the Pound yesterday and also increased to a near-record level versus the Dollar as the EC sentiment index pointed to further growth in consumer and business confidence. Recent economic reports have suggested that the European economy is gathering momentum after expanding at the fastest pace in seven years in 2006 with confidence staying close to a six year high in April. The index also provided a further indication that business sentiment continues to remain robust, withstanding higher oil prices and rising interest rates as well as the slowdown in the U.S, which is likely to hamper Euro-zone export growth. There has been widespread concerns that the Euros dramatic appreciation against the Dollar would begin to weigh heavily on economic growth despite record low unemployment. However, the pace of expansion is likely to convince policy makers to raise interest rates for the eighth time since late 2005 with the next likely increase scheduled for June. The May Day holiday today may prevent the Euro from consolidating on the recent gains made against the Pound.

The Pound managed to make rapid gains against the Dollar yesterday as an early report showed that UK house prices increased by the most in nearly four years in April despite interest rates currently standing at a five-year high. The Hometrack survey conveyed a clear message that growth in the property market will continue to gather momentum with the average cost of a home rising 6.8% year-on-year in April. The sustained and overwhelming increase in house prices will bolster the chances of further monetary tightening in the UK as the Bank of England look to raise interest rates a further 25 basis points next week. That sentiment has propelled the Pound to highest level against the Dollar since June 1981 although other reports have pointed to a gradual cooling of the UK housing market. In terms of economic data, the Pound may stay relatively strong this morning as a report on the UK manufacturing sector is expected to show that growth in factory production remained virtually unchanged in April.

Data Released 1st May

UK 09:30 CIPS Manufacturing Survey (April)

UK 11:00 CBI Distributive Trades Balance (April)

U.S 15:00 ISM Manufacturing Index (April)

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

written by Adam Solomon