Daily Insight

Following on from last week, the Dollar has resumed the upward momentum against the Pound despite a worse-than-expected report on the U.S labour market on Friday. The monthly nonfarm payroll numbers showed that the economy added the fewest amount of jobs to payrolls in over two years in April while the unemployment rate increased to 4.5%. The softening of the U.S labour market, which has supported economic growth this year, will be a concern to policy makers as higher fuel prices combined with lower wage growth may weigh heavily on consumer sentiment. The Dollar gained 0.2% against the Pound yesterday as we continue to test the trend support around 1.9875 while the focus this week will undoubtedly fall on the Federal Reserve interest rate announcement this evening. The chairman, Ben Bernanke, may give a clearer signal on U.S monetary policy after comments in April left investors speculating over the Central Bank's intentions. However, with U.S economic growth failing to gather momentum combined with seemingly moderating inflationary pressures, the Fed are likely to leave interest rates on hold at 5.25%. The U.S economy has been expanding at a 'moderate' pace this year as higher petrol prices, fewer jobs and a weakening housing market continue to hamper growth.

The Euro came under pressure against the majors yesterday, dropping 0.4% versus the Dollar as we scale back from the record highs achieved last week and a further 0.2% against the Pound. The single currency suffered as a barren run of economic data showed that German industrial production unexpectedly slowed in March as a strong Euro continues to weigh on European exports. That sentiment has been echoed earlier today as a separate report showed that German exports declined in March as foreign investors sought cheaper alternatives elsewhere. Overseas sales fell 1.4% from February, which was significantly higher than anticipated as the Euros dramatic appreciation against the Dollar this year continues to weigh on demand. Export growth has been the catalyst of economic growth in Europe's largest economy, which has expanded at the fastest pace in over seven years. Nevertheless, the European Central Bank are still widely expected to increase borrowing costs in June although policy makers may leave interest rates on hold at 3.75% tomorrow.

The Pound managed to make modest gains against the Euro yesterday but continued to downward slide versus the Dollar as we build up to the Bank of England interest rate announcement tomorrow. Over the past month, a host of economic reports have given the monetary policy committee scope to lift rates beyond the current 5.25% with some investors speculating that a 50 basis point hike may be necessary with inflation at the highest level in a decade. The market has already factored in a quarter of a point rise in UK interest rates in May but with service sector growth at the slowest pace in seven months, a more aggressive move from the Bank of England looks increasingly unlikely. Therefore, the Pound may come under some pressure if the MPC decide to lift rates by just 25 basis points and sellers of Sterling would be well placed to work a stop order to protect against an adverse move in the market. Nevertheless, the Pound has received a timely boost this morning as a report from the Nationwide Building Society showed that UK consumer confidence rose to the highest level in six months in April. The report illustrates that three interest rate increases since last August has failed to curb consumer optimism over employment and wage growth.

Data Released 9th May

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon