Daily Insight

The Euro declined for a second consecutive day against the Pound, dropping 0.3% by the close of trading last night while also holding near a six-week low versus the U.S Dollar despite a seemingly positive report on German investor confidence. The ZEW Centre for Economic Research said its index of investor and analyst expectations increased to a reading of 24.0 in May, the highest level since June 2006 as economists raised their forecasts for economic growth this year. The report yesterday provides an insight into the pace of economic expansion, which has seen the economy grow at the fastest pace in seven years. European economic growth has continued to gather momentum despite consistently higher interest rates and the introduction of the value-added tax increase at the start of the year, which has prompted the government to raise its forecast for 2007 to 2.3% from 1.7% previously estimated. However, the Euro failed to capitalise on the strength of the ZEW survey and declined against both the Pound and the Dollar. In terms of economic data, the single currency may find some support this morning as German industrial orders are expected to advance 1.2% in March while rising to an annual rate of 7.1%. Although, given the overwhelming strength of the Euro in recent months, orders are expected to fall significantly in April as the single currency rose to a record high against the U.S Dollar.

The Dollar managed to rise modestly against the Euro yesterday and also held near a six-week high versus the Pound despite the distinct lack of economic data released this week. The recent strength of the U.S currency can be attributed to a sharp rebound in factory production and manufacturing output although the Dollar's recovery may be short-lived given that a number of medium-term factors that still pointed to weakness. In addition, the Dollar was supported by comments yesterday from the president of the Federal Reserve Bank of Richmond, Jeffrey Lacker, who seemed to suggest that inflationary pressures still remain a concern to policy makers despite slower growth. In the last four monetary policy setting meetings, Lacker has been the sole voice for a further rise in U.S interest rates and the hawkish tone of his speech yesterday further established his belief that price pressures are set to drift higher.

The Pound has been slowly making significant strides against the Euro over the past few trading sessions and also increased 0.1% versus the Dollar by the close of trading last night. The focus today will heavily on the release of the minutes from the Bank of England's last policy meeting where the MPC elected to lift interest rates for the fourth time in this tightening cycle to 5.50%. The nine-strong committee elected that a 25 basis point rise in the benchmark lending rate would be necessary in order to stabilise inflation, which has accelerated to the fastest pace in a decade this year. However, the voting pattern of the decision will be eagerly anticipated with the committee expected to have voted 8-1 in favour of a rise this month with David Blanchflower likely to lean towards a cut. If the outcome of the minutes proves indecisive and the committee's decision split, the Pound may come under some severe pressure against both the Euro and the Dollar.

Data Released 23rd May

UK 09:30 MPC Minutes (May 9-11 Meeting)

EU 10:00 Industrial Orders (March)

written by Adam Solomon