Daily Insight

The Pound came under renewed and sustained pressure against the majors yesterday, dropping 0.4% against the Euro and over 1.0% versus the U.S Dollar following the Bank of England's decision to hold interest rates at 5.50%. The nine-strong monetary policy committee including the governor, Mervyn King, elected to wait and assess the impact of the previous rate increases before a likely move in August. Although the decision to hold rates was widely anticipated, the Pound had been gathering momentum amid speculation that the MPC could move early and raise back-to-back in June. However, in the aftermath of the announcement, the Pound suffered and by the close of trading last night had fallen through 1.9700 versus the Dollar as the decision undermined the relative yield support for the Pound. Recent reports have indicated that rising borrowing costs, which remain the highest of all the Group of Seven countries, have begun to slow the housing market and is beginning to weight on consumer spending. The Pound is likely to continue the downward trend against the majors over the coming week as the MPC's decision to hold rates would of been influenced by the May consumer price index, which is released next Tuesday. In terms of economic data, the Pound may find some relief this morning as UK industrial production is expected to rise 0.2% in April while output may of increased 1.3% from a year earlier.

The Euro made significant gains against the Pound yesterday but came under renewed pressure versus the U.S Dollar amid a sparse supply of economic data released in the Euro-zone. The single currency was also undermined earlier today as a report in Germany showed that exports rose less than forecast in April as speculation continues to build that growth in Europe's largest economy may have peaked. German economic expansion, which has expanded as the fastest rate in seven years, has been heavily reliant of export growth but with the Euro rising to a record level against the Dollar this year, the demand for European based goods is dwindling. The disappointing report may correlate with a drop in factory orders and German industrial production is only expected to increase modestly in the figures released for April.

The Dollar managed to take advantage of the Pound yesterday, dropping through 1.9700 and also increasing 0.6% against the Euro amid speculation that U.S economic growth will gradually pick-up towards the end of the year. A number of economists are anticipating that the economy will expand at an annual rate of 2.6% following robust strength in the labour market and a rebound in the manufacturing sector. The report has fuelled speculation that the Federal Reserve will keep interest rates steady at 5.50% for the remainder of 2007 despite initial expectation of a cut towards the second half of the year. In terms of economic data, the Dollar may continue to make gains this afternoon as U.S trade data is expected to show that the deficit in goods and services narrowed slightly in April. The weakness of the Dollar, which fell to a record low against the Euro earlier this year, helped boost U.S exports to look far more attractive to foreign investors.

Data Released 8th June

UK 09:30 Industrial Production (April)

- Manufacturing Output

GER 11:00 Industrial Production (April)

U.S 13:30 Trade Balance (April)

written by Adam Solomon