Daily Insight

Following on from last week, the Dollar failed to consolidate on the recent gains made against the Pound as the U.S currency fell 0.5% by the close of trading on Friday following a host of seemingly negative economic reports. A measure of U.S inflation showed that consumer prices rose less than anticipated in May with the core rate rising just 0.1% excluding the volatile food and energy gauge. The annual rate of inflation rose just 2.2% in May, the smallest gain since March 2006 as the risks to price stability appear limited going into the second half of 2007. Elsewhere, separate reports in the U.S showed that the University of Michigan's sentiment index fell in the preliminary estimate for June while reports from the Federal Reserve gave conflicting ideas on the strength of the manufacturing sector. The Empire state index showed that factory production in the New York area increased dramatically this month while U.S industrial production remained unchanged following a 0.4% increase in April. As a result, the Dollar came under intense pressure versus the Pound and rose above 1.9800 ahead of a sparse week in terms of U.S economic data.

The Euro failed to capitalise on a weak Pound last week and dropped to a 2-month low against the U.S Dollar amid a distinct lack of economic reports released in the Euro-zone. Europe's trade deficit with the far east swelled by a third in the first quarter of the year as the gap in trade with China expanded 33% in the January-to-March period. However, the single currency may receive a timely boost this week as the focus switches to the German economy amid the release of the ZEW survey into investor confidence and the Ifo index for business sentiment. The consensus forecast suggests that sentiment will remain near a record high in June as the German economy continues to expand at a robust pace despite higher interest rates and the increase in value-added tax at the start of the year.

Initially, the Pound came under severe pressure against the majors last week after consumer price inflation moderated to 2.6% year-on-year in May while average hourly earnings increased less than forecast. Nevertheless, the governor of the Bank of England managed to increase Sterling sentiment after his comments in Cardiff increased speculation that UK interest rates will rise by a further 25 basis points. Therefore, the focus this week will fall heavily on the minutes from the Bank of England's last policy meeting where the nine-strong committee elected to hold UK rates at 5.50%. The report should provide an insight into the timing of the next rate increase and it will be interesting to ascertain how many members of the MPC are switching towards a tightening bias. In terms of economic data, the Pound has remained fairly stable this morning despite a report from Rightmove plc, which showed that London house prices rose that the slowest pace in five months.

Data Released 18th June

U.S 18:00 NAHB Housing Market Index (June)

written by Adam Solomon