Daily Insight

The Euro managed to snap a four-day losing streak against the Pound yesterday, rising 0.3% versus the UK currency and the U.S Dollar following a number of hawkish statements from ECB officials. The President of Bundes-bank, Alex Weber and a member of the European Central Bank's governing council both supported the single currency as their comments increased the chances of further monetary tightening beyond the projected June rate increase. The Central Bank have raised European interest rates on seven occasions since late 2005 and following a statement from the chairman, Jean-Claude Trichet, earlier this month a June rate hike seems inevitable. Despite inflation staying below the ECB's 2.0% ceiling for the past five-months, it seems that the governing council believe that inflationary pressures will continue to rise over the coming months as growth in the economy gathers momentum and performs at the fastest pace in seven years. In terms of economic data, the Euro may remain on the front foot this morning amid the release of M3 money supply data, which is expected to show a modest decline in the three-month moving average for April but should still remain a concern to policy makers.

The recent strength of the Pound has been gathering momentum over the past week following the release of the minutes from the BoE's last policy setting meeting where it was revealed that the committee voted 9-0 in favour of a rate increase this month. The overwhelming support for a fourth quarter-point rise since August increased the chances of further monetary tightening over the coming months and as a result, the Pound made significant gains against both the Euro and the Dollar. However, recent economic reports have indicated that rising borrowing costs are beginning to slow the property market and further evidence of this was emphasised in a report from the British Bankers' Association yesterday. The number of mortgages approved for UK house purchases barely rose in April with lenders granting 64,815 loans, up from 64,183 a year earlier. The report underlines that consumers are becoming increasingly concerned with the prospect of higher interest rates after the BoE increased the benchmark lending rate to the highest level in six-years earlier this month.

The Dollar managed to rise 0.3% against the Pound yesterday but failed to consolidate on the recent gains made versus the Euro despite a particularly positive report on U.S consumer confidence. The report showed that Americans are becoming increasingly optimistic over the direction of the economy and will continue to spend despite record high petrol prices and slumping home values. The conference board's index rose to a reading of 108.0 in May from a revised 106.3 the previous month, which was the lowest level in five months. However, a resilient labour market combined with robust wage growth is helping fuel consumer spending and support economic growth in the face of the worst slump in housing for over 17-years. A nationwide survey showed that home values dropped 1.4% from the first quarter of 2006 and represents the first annual decline since 1991. However, the robust growth in the U.S labour market means that Americans are feeling more secure about their jobs with the unemployment rate currently at the second-lowest level in over six years. As a result, the Dollar made widespread gains against both the Euro and the Pound and that trend may continue this afternoon amid the release of the ADP employment report.

Data Released 30th May

EU 09:00 M3 / 3 Month Moving Average (April)

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

U.S 19:00 Minutes 9th May FOMC meeting

written by Adam Solomon