Daily Insight

The Pound came under significant pressure against the majors yesterday, dropping close to the lowest level this year versus the Euro and closing last night under 1.9875 against the U.S Dollar. The decline of the Pound was instigated by a drop in consumer price inflation last month, which fell from a decade high of 3.1% in March to 2.8% in April. The report also highlighted that UK inflation exceeded the Bank of England's 2.0% target for the twelfth consecutive month. Combined with the unexpected rise in UK factory-gate inflation over the same period, it seems evident that higher interest rates have yet to cool the economy. Nevertheless, the Pound continued the downward momentum against the Euro, despite the report increasing the chances of further monetary tightening this year. In terms of economic data, the Pound may receive a timely boost this morning with UK unemployment expected to stay unchanged at 5.5% in April. The focus is likely to fall on a separate gauge of the report, which may show that average hourly earnings jumped from 4.6% in February to 4.8% in the three months leading to March. Policy makers within the BoE's monetary policy committee will be watching earnings growth closely as higher interest rates put downward pressure on consumers' disposable income. Elsewhere, the BoE's quarterly inflation report is likely to dominate and the theme of the report will be watched closely following a fourth interest rate hike in under a year.

The Euro continued to make gains yesterday, rising 0.4% against the Dollar and a further 0.2% versus the Pound following the flash estimate of European economic growth in the first quarter. The Euro-zone economy expanded by more than forecast in the first three months of the year as increased business investment supplements higher interest rates and the introduction of the German VAT increase at the start of the year. The economy grew 0.6% in the first quarter, which was slightly above initial expectations as European companies increased investment after strong export growth led to the fastest expansion in seven years. However, the Euro has appreciated over 10% against the Dollar over the past six months and reached a record high in April, which may hamper EU exports and weigh heavily on economic expansion over the coming months. The Euro may struggle to consolidate on the recent gains made against the Dollar this morning as the final estimate of Euro-zone consumer prices is expected to show that inflation remained unchanged at 1.8% in April and under the Central Bank's 2.0% target.

By the close of trading last night, the Dollar had declined against the Pound and also fell significantly versus the Euro following a report from the Labour department, which showed that U.S inflation was abating. Consumer prices rose less than forecast in April, increasing 0.4% from March to an annual pace of 2.3%, which may prompt the Federal Reserve to lower interest rates sooner than previously anticipated. The Fed have previously estimated that inflation would moderate as the economy continues to slow and the report yesterday heightens the chances of monetary easing in the second half of the year. In addition, the Dollar failed to find a reprieve as a separate report showed that manufacturing activity in the New York state expanded at a faster pace for the second consecutive month in May as foreign investors sought cheaper goods from the U.S. Recent reports from the Institute of Supply Management have suggested that a recovery in manufacturing will soften the impact of the dramatic slump in housing over the last year, which has contributed to slowest pace of economic growth in nearly 5-years.

Data Released 16th May

UK 09:30 Unemployment Rate (April)

EU 10:00 Harmonised CPI (Final April)

UK 10:30 BoE Quarterly Inflation report

U.S 13:30 Housing Starts (April)

U.S 13:30 Housing Permits (April)

U.S 14:15 Industrial Production (April)

written by Adam Solomon