Daily Insight

The positive sentiment surrounding the Pound continued yesterday as the UK currency rose a further 0.1% against the Euro but made robust gains versus the U.S Dollar, closing last night well above the 1.9900 level for the first time in four-weeks. From a technical perspective, it seems evermore likely that the Pound will now test the resistance around the $2.00 level and could perhaps trade higher on speculation that the Bank of England may raise interest rates this week. As a result, the Pound has shrugged off a report this morning from the British Retail Consortium as UK retail sales rose at the slowest pace since November last month. Sales increased just 1.8% year-on-year in May, which represents the smallest gain in six months, following a 2.4% annual gain in April. The report provides a strong indication that consumer spending will continue to dwindle over the coming months after the Bank of England raised borrowing costs four times in nine-months in an attempt to bring inflation back towards target. The relatively soft tone of the BRC retail sales survey may convince policy makers to hold interest rates this month and await further assessment of the impact of previous rate hikes. Elsewhere, the Pound may remain on the front foot this morning as a separate report may show that growth in UK service industries remained at an elevated level in May, dropping modestly from a reading of 57.0 from 57.2 in April.

Meanwhile, the Euro advanced 0.3% against the fragile U.S Dollar yesterday following a report on European producer price inflation, which gave a strong indication that companies were intent on increasing prices and thusly weighing on the already strong inflationary concerns. The European Central Bank are scheduled to raise interest rates by a further 25 basis points tomorrow and many investors anticipate at least one further rate hike later this year. However, the chairman of the Central Bank, Jean-Claude Trichet, has resisted criticism from the newly appointed president of France, Nicolas Sarkozy and the governor of the Bank of France, Christian Noyer. Trichet's faith in the importance of money supply as a measure of inflation has recently been called into question and since Noyer sits with Trichet on the ECB's governing council, the
difference of opinion may extend to the decision on monetary policy. In terms of economic data, the Euro may receive a boost this morning as the Purchasing Manager's index into European service industries is expected to show further expansion in May while a gauge of retail sales may increase 0.3% from the previous month.

The Dollar continued to struggle against the majors yesterday and has failed to sustain the positive momentum from last week despite a host of stronger-than-expected U.S economic data. The U.S currency came under further pressure yesterday, dropping 0.7% against the Pound as factory goods orders rose less than anticipated in April with bookings rising just 0.3% following a 4.1% increase in March. The U.S economy has suffered the slowest pace of expansion in over four-years but recent reports have indicated that a pick-up in manufacturing activity would bolster economic growth in the second half of the year. Therefore, the negative impact of the report yesterday is thought to be a temporary setback as a weak Dollar makes U.S exports look considerably more attractive to overseas investors. Nevertheless, the Dollar may receive a timely boost this afternoon as the ISM non-manufacturing index is expected to show that growth in the U.S service sector stayed close to a three-month high in May.

Data Released 5th May

UK 09:30 CIPS Services Survey (May)

EU 09:00 Services PMI (May)

EU 10:00 Retail Sales (April)

U.S 15:00 ISM (non-manufacturing) Index (May)



written by Adam Solomon