Daily Insight

The Pound came under renewed pressure yesterday, falling 0.4% against the U.S Dollar and a further 0.1% versus the Euro to trade at lowest level in two months following the release of the Bank of England's quarterly inflation report. The hawkish tone of the Central Bank reinvigorated the chances of another 25 basis point rise in UK interest rates but said that inflation was expected to moderate back towards target in the final quarter. The UK economy has expanded at the fastest pace in two years and the BoE reiterated yesterday that GDP growth has been maintained in the first quarter while credit and money growth remained consistent with previous estimates. With regards the future projections of UK inflation, the report reiterated that inflationary pressures remain to the upside in the medium term although were expected to moderate back towards the 2.0% target by the final quarter. As a result, the Pound declined against the Euro, dropping towards the lowest level this year at 1.4575 despite a separate report that showed UK unemployment fell to the lowest since 2005. However, average hourly earnings growth unexpectedly slowed in April, dropping to 4.5% from 4.6% the previous month, which suggests that inflation is clearly falling with earnings being the third indicator that has surprised to the downside.

The Euro advanced against Sterling yesterday but declined unexpectedly versus the U.S Dollar despite a host of hawkish statements from a number of ECB governing council members who reiterated the need for further monetary tightening. Earlier this month, the chairman of the Central Bank, Jean-Claude Trichet, gave a strong indication that interest rates would rise for the seventh time in little over a year in June. Initially, the single currency made rapid gains yesterday after the final estimate of Euro-zone inflation remained unchanged at 1.9% in April. The harmonised consumer price index came in slightly stronger than expected and suggests that risks to price stability remain a concern to policy makers. There is a sparse supply of economic indicators released in the Euro-zone this morning with the focus falling on the ECB monthly bulletin, which will probably contain the same hawkish tone as the accompanying statement and enhance the chances of a quarter-point rate hike in June.

The positive sentiment surrounding the Dollar continued yesterday as the U.S currency made widespread gains against most major currencies following the renewed optimism in the housing market. Builders started work on more new homes than anticipated in April with housing starts rising 2.5% from the previous month, suggesting that worst slump in the sector in 17-years is finally showing signs of abating. However, a separate gauge of the report showed that the number of building permits filed for new construction actually saw the slowest pace of growth in ten-years. In addition, a report earlier this week showed that the NAHB index of builder confidence sank to another decade low and the assumption that growth in the property market may accelerate over the coming months may be a touch premature. Elsewhere, the Dollar managed to consolidate on the recent gains made against the Pound as U.S industrial production increased beyond expectations in April. Factory output was up 0.7% on the month and it seems evident that a weak dollar as provided a reprieve for manufacturing as recent reports have reflected a revival of growth in the sector.

Data Released 17th May

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Weekly Jobless Claims (w/e 12th May)

U.S 15:00 Leading Indicators (April)

U.S 17:00 Philly Fed Index (May)

written by Adam Solomon