Daily Insight

The Euro declined against both the Pound and the Dollar yesterday despite the ECB's decision to lift interest rates by a further 25 basis points and to the highest level in six-years at 4.0%. The Euro stayed virtually unchanged against the majors in the aftermath of the announcement as the market looked to the accompanying press conference for a further indication of future monetary policy. The governing council, led by the chairman, Jean-Claude Trichet, reiterated that the current lending rate is still on the 'accommodative' side despite today's rate increase and he opened the door for a further hike later this year. In his statement, Trichet reiterated that the Central Bank would need to act in a 'firm and timely manner in order to ensure that price stability in the medium term is warranted. Recent statements from a number of ECB officials have indicated that the Central Bank is concerned that producer prices will continue to rise as the economy enjoys the fastest pace of expansion in over seven years. As a result, the Euro may continue to make gains against Sterling, especially if the Bank of England decide against a rise in rates tomorrow. Therefore, Euro buyers would be well placed to take advantage of the current buying rate or at least place a stop order above 1.4600.

The Pound continued to make modest gains against the Dollar yesterday and also rose 0.1% versus the Euro despite a report from the Confederation of British Industry, which showed that UK retail sales rose at the slowest pace since November last month. The report provides an indication that consumer spending will continue to decline over the coming months as the Bank of England continues to raise interest rates to the highest level since 2001. The Pound has been making steady gains this week amid increased speculation that the monetary policy committee would lift interest rates back-to-back in June after inflation reached the highest level in over ten-years. However, the considered view is that the MPC will hold rates steady at 5.50% this month and wait to assess the impact of four previous rate increases since August last year. As a result, the Pound may come under some pressure this afternoon and Euro and Dollar buyers would be well placed to work a stop order in the market to protect against any adverse movement.

The Dollar managed to claw back some modest gains against the Euro yesterday and remained virtually unchanged versus the Pound as U.S productivity rose less than anticipated in the revised estimate for the first quarter. Worker productivity increased at an annual rate of 1.0% in the first three months of 2007 while a separate gauge of the report indicated that labour costs rose more than expected. The report only emphasises recent comments from the chairman of the Federal Reserve, Ben Bernanke, who stated that the economy would expand at a moderate pace with persistent inflation concerns.

Data Released 7th June

UK 12:00 BoE Rate Announcement

U.S 13:00 Initial Jobless Claims (w/e 2nd June)

U.S 15:00 Wholesale Inventories (April)

written by Adam Solomon