Daily Insight

Following on from last week, the Pound managed to consolidate on the recent gains made against both the Euro and the Dollar and headed for its first weekly gains in over a month amid widespread speculation that the Bank of England would continue raising interest rates this year. In addition, a report on Friday showed that the UK economy had accelerated at a faster pace than initially forecast in the first quarter, spurred by robust consumer spending and increased business investment. The revised estimate of UK gross domestic product rose 2.9% from 2.8% in the first three months of 2006 as rising house prices helped the economy grow at the fastest pace in nearly three years. However, the robust pace of economic growth is also fanning the flames of inflation, which has exceeded the BoE's 2.0% target for the majority of the past year and leads investors to speculate that further rate hikes are imminent. Elsewhere, a separate report from the Confederation of British Industry showed that an index of prices among UK manufacturers reached the highest level in 12-years in May. The significance of the report is that companies continue to raise prices, which in turn leads to higher wage demands and a spiral in inflation.

The Euro has remained relatively unchanged after the Bank holiday and is still struggling against both the Pound and the Dollar ahead of a key week in terms of European economic data. Growth in manufacturing and the EC sentiment indices are expected to remain at levels consistent with a robust pace of growth while the unemployment report on Friday is expected to remain near a record low at 7.2%. Elsewhere, the Euro may find further support as European consumer confidence probably remained near the highest level in six-years in May as the sentiment index held steady at a reading of 111.0. Recent economic indicators have increased the possibility that the growth in the economy will eclipse that of the U.S for the first time in six years in 2007. A major concern for ECB policy makers has been the projected impact of a U.S slowdown in terms of exports but the resilience of the Euro-zone economy has strengthened the Central Bank's resolve to continue raising interest rates this year.

The Dollar managed to find some support towards the end of last week, rising modestly against both the Euro and the Pound following a report on the U.S housing sector. The unexpected and robust growth in the sales of new homes prompted renewed speculation that the dramatic slump in the market had peaked and would begin to contribute towards economic growth in the second half of the year. In terms of economic data, the renewed sentiment for the Dollar may continue this week with the focus falling on the monthly U.S job report this Friday. Preliminary forecasts suggest that the economy added 125,000 new jobs to payrolls in May, up from just 88,000 the previous month as the market looks for any insights into developments within the U.S labour market. The Dollar may find further support this afternoon as a gauge of U.S consumer confidence is expected to rise from the lowest level in eight months in May as strong wage growth boosts spending. Strong consumer sentiment has been a major contributor towards U.S economic growth this year and has thus far cushioned the economy from the underlying effects of slumping house prices and rising fuel costs.

Data Released 29th May

U.S 15:00 Consumer Confidence (May)

written by Adam Solomon