Daily Insight

The Pound managed to increase dramatically against the U.S Dollar yesterday, rising close to the highest level in 26-years to test the resistance level at 2.0070 while also making significant strides forward versus the Euro. The positive sentiment surrounding the UK currency came in spite of a weaker-than-expected report on the manufacturing sector, which grew at the slowest pace in three months in April. The CIPS survey fell to a reading of 53.9 last month and although a figure above 50 indicates expansion, the report provides a further indication that factory production is struggling as the Pound continues to appreciate in value. The Pound has increased 10% against the Dollar in the past year alone as higher inflationary pressures caused the Bank of England to increase borrowing costs to a five-year high at 5.25%. Elsewhere, the Pound continued to rise for a third consecutive day against the Dollar and also rose 0.4% versus the Euro as a separate report from the Confederation of British Industry further enhanced the chances of an interest rate hike next week. Consumer spending has been a primary driver of economic growth this year and the report yesterday showed that retail growth had reached the highest level in two years last month. In terms of economic data, the Pound may come under some pressure this morning as a report from the Bank of England could show that UK mortgage approvals declined in March as the prospect of higher borrowing costs discourage first-time buyers.

The May Day holiday proved negative for the Euro yesterday as the single currency dropped significantly against both the Euro and the Dollar due to the distinct lack of economic data released in the Euro-zone. That trend should alter this morning as the European Purchasing Manager's index is expected to show that manufacturing edged higher in April. The headline measure of the report may suggest that industrial activity is slowing as the Euro continues to gather momentum, increasing to a record high against the U.S Dollar over the past week. Many politicians and governing council members have expressed concerns that economic growth will begin to slow as the slowdown in the U.S hampers demand for European exports. However, recent reports have suggested that the economy is weathering a strong Euro and a separate report this morning may show that unemployment fell to a record low 7.2% in March from 7.3% the previous month.

Initially, the Dollar came under severe pressure against the Pound yesterday but managed to close just under the $2.00 barrier as the ISM index showed that U.S manufacturing unexpectedly advanced in April. The slump in factory production and output has been a real drag on U.S economic expansion this year but the index increased to a reading of 54.7 last month, which represents the biggest rise since May 2006. Companies have been reducing inventories over the past two quarters but the report yesterday may signal an imminent rise in production as the dramatic fall in value of the Dollar makes U.S exports look far more attractive, thusly reducing the trade deficit. Elsewhere, the Dollar remained largely unchanged after a separate report showed than an index of pending home sales in the U.S unexpectedly fell to the lowest level in four-years in March. The dramatic and sustained slump in the real estate market is showing few signs of peaking and the report yesterday further illustrated that the wave of subprime mortgage defaults is swelling the market with unsold homes. Nevertheless, the Dollar managed to consolidate on the gains made against the Pound in the aftermath of the manufacturing report and may make further gains today as an index of factory goods orders is expected to rise 2.0% in March.

Data Released 2nd May

UK 09:30 Consumer Credit (March)

UK 09:30 Mortgage Approvals (March)

EU 09:00 Manufacturing PMI (April)

EU 10:00 Unemployment Rate (March)

U.S 13:15 ADP Employment Report (April)

U.S 15:00 Factory Goods Orders (March)

written by Adam Solomon