Daily Insight

The Pound continued to make significant gains against the majors yesterday, rising 0.4% versus the Euro and the Dollar as we build up to the Bank of England interest rate announcement this lunchtime. The monetary policy committee are widely expected to lift the benchmark lending rate to 5.50%, the fourth quarter-point increase since August last year and the highest since April 2001. Over the past few weeks, there has been widespread speculation that the nine-strong committee including the governor Mervyn King may adopt a more aggressive policy since UK inflation is currently at the highest level in over ten years. However, following the downward revisions in service sector growth the chances of a 50 basis point jump are remote and as a result, the Pound may come under some pressure this afternoon if the Bank of England elect to lift rates by just a quarter of a point. In terms of economic data, the Pound has continued to advance this morning as the latest report on the UK property market showed that house prices rose in April at the second fastest pace since mid 2005. Elsewhere, Sterling may continue to strengthen in the build up to the announcement as a separate report this morning may show that industrial production accelerated in March with output up 0.5% from the previous month despite the profound strength of the UK currency. In addition, the Prime Minister Tony Blair is widely expected to announce his retirement today and may lend his support to the Chancellor Gordon Brown who handed the Bank of England the authority to set interest rates after coming to power ten years ago.

The Euro failed to capitalise against the Dollar yesterday and also came under further pressure versus the Pound as German exports unexpectedly declined in March, leading to speculation that a strong European currency would begin to slow the economy. The focus today will inevitably fall on the European Central Bank rate announcement this afternoon with the governing council expected to hold the benchmark lending rate at 3.75% in May. However, in the accompanying press conference the chairman of the ECB, Jean-Claude Trichet, is widely expected to signal a further quarter-point rise in June. The market has factored in a strong chance that rates will rise to 4.00% next month and we will be looking for a specific tone and language in the statement this afternoon with the term "strong vigilance" historically used as a sign rates will rise the following month.

The Dollar managed to hold steady against the Euro yesterday as the Federal Reserve elected to hold U.S interest rates at 5.25% for the seventh consecutive meeting while the accompanying statement was little changed from the previous month. It seems that the Fed chairman, Ben Bernanke, is unfazed by the weakest economic growth in four years as he reiterated his hawkish stance on inflation. The Open market committee remains concerned that U.S inflationary pressures have failed to moderate over recent months and that is likely to keep policy makers from cutting interest rates over the medium term. In terms of economic data, the Dollar may come under further pressure this afternoon amid a host of economic reports with the U.S trade deficit expected to widen for the first time in three months in March. The gap between imports and exports may grow above $60 billion as the price of crude oil rose over the same period to the highest level in six months.

Data Released 10th May

UK 09:30 Industrial Production (March)

- Manufacturing Output

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Trade Balance (March)

U.S 13:30 Initial Jobless Claims (w/e 5th May)

U.S 13:30 Export Prices (April)

- Import Prices

U.S 19:00 Treasury Budget (April)

written by Adam Solomon