Daily Insight

Following on from last week, the Pound has declined heavily against the U.S Dollar after the Bank of England elected to hold interest rates at 5.50% in June and further downside movement can be expected ahead of a packed week of UK economic data. Although the outcome of the two-day meeting was widely anticipated, the Pound had been rallying all week on increased speculation that the MPC could move early this month. The Pound came under severe pressure in the aftermath of the announcement, and by the close of trading on Friday had dropped towards 1.9600 against the Dollar despite a positive report on UK manufacturing. The report from the Office of National Statistics showed that factory production had increased for a second consecutive month in April with output rising 0.3% from the previous month. The report provides a strong indication that growth in the UK manufacturing sector will continue to gather momentum over the coming months as rapid growth in Europe helps cushion the effects from the Pound's dramatic appreciation against the Dollar this year. In terms of economic data, the focus this morning will fall on the UK producer price index, which is expected to show that inflationary pressures remained unchanged in May.

The Euro managed to claw back some modest gains against the Pound last week but continued to decline versus the U.S Dollar despite the ECB's decision to lift European interest rates for the eighth time since late 2005. In the accompanying press conference, the chairman, Jean-Claude Trichet, gave a strong indication that rates would rise at least once more this year as he said that the current benchmark lending rate still remains at an 'accommodative level. However, the Euro failed to make robust gains against the majors as a report in Germany showed that industrial production fell by the most in seven years in April. Factory output dropped 2.3% from March, which represents the biggest contraction since June 2000 and the first decline in six months as a strong Euro combined with the U.S slowdown threatens to curb European exports. The report suggests that growth in Europe's largest economy may have peaked following the fastest pace of expansion in over seven years. In terms of data, the Euro may continue to struggle this week as there is a sparse supply of economic indicators released in the Euro-zone with the focus falling on the May inflation readings and industrial output.

The recent positive sentiment surrounding the Dollar continued towards the end of the week as the U.S currency increased nearly 2.0% against the Pound and also rose to the highest level in two months versus the Euro following a string of positive economic reports. The U.S trade deficit showed that the gap in goods and services narrowed by more than anticipated in April as exports rose to a record level after the Dollar fell to a record low against the Euro earlier this year. The gap in trade in trade fell 6.2% from March to the lowest level in six months as overseas demand for American made goods soared. There is a host of significant economic reports released in the U.S this week with the focus falling on retail sales on Wednesday. The report is expected to show that growth in sales accelerated to 3.6% in May as record fuel costs drives consumer spending. Elsewhere, the Dollar may receive a further boost ahead of a host of U.S activity data while the market will also be paying close attention to the current account deficit and a speech from the Fed chairman, Ben Bernanke on Friday.

Data Released 11th June

UK 09:30 Producer Price Index (May)

- Output

written by Adam Solomon