Daily Insight

The Pound has been struggling over the past few trading sessions and the UK currency fell a further 0.2% versus the Dollar yesterday as we look set to revisit the trend support around 1.9650.

Nevertheless, the Pound took advantage of broad Euro weakness to trade higher by the close last night despite reports that UK retail sales fell at the fastest pace in over a year last month.

The Office of National Statistics said that sales plunged 0.4% on the month in March and while the figures were almost in line with the median forecast, they revealed an underlying weakness in consumer spending that threatens to curtail the pace of economic growth.

Although the latest sales figures showed the biggest monthly drop in nearly a year, a separate gauge of the report showed that the yearly growth rate remained robust.

Retail sales in the first quarter of 2008 have actually increased 2.0% from this
stage last year, which represents the largest quarterly gain since mid 2006. The Bank of England have previously expressed concerns that the monthly sales report has proved far too erratic as a gauge of economic growth and more emphasis should be placed on the trend growth rate.

Elsewhere, the cautious approach from some BoE policy makers was vindicated as a separate report from the Confederation of British Industry showed that manufacturers have continued to raise prices even as activity slows.

The monthly trends survey showed that orders plummeted in March to the lowest level since October 2006 while higher prices will feed into inflation and force the Bank of England to re-evaluate their monetary outlook.

The Euro has risen nearly 10% against both the Pound and the Dollar this year but the single currency has declined for a second day in a row following reports that business confidence in Germany and France fell to the lowest level in over two years.

The Ifo sentiment index, which accounts for business confidence in Europe's largest economy, slipped to a reading of 102.4 this month. The reading represents the lowest since January 2006 while the equivalent index in France showed that confidence had plunged to a 16-month low.

The Euro fell over a cent against the Dollar and also recorded significant losses versus the Pound as the reports combined paint a fairly gloomy picture on the outlook for the Euro-zone economy as record high food and energy costs stoke inflation.

The positive momentum surrounding the Dollar ran into a second day yesterday as the U.S currency paired further gains against the majors amid speculation that the Fed has done their job in securing the future outlook for the U.S economy.

In addition, the Dollar found further support as U.S durable goods orders rose unexpectedly last month, indicating that a weak currency is fuelling exports and helping factories cope with the slowdown in growth.

Orders for goods designed to last several years rose 1.5% in March while a separate report showed that initial jobless claims actually fell to a two month low last week.

The dwindling sentiment surrounding the U.S labour market has weighed on the Dollar in recent weeks but unemployment claims plummeted to 342,000 in the week ending 25th April.

The Dollar also managed to shrug off a particularly disappointing report on the housing market as sales of new homes dropped 8.5% in March, which represents the fewest number since October 1991 and dismisses suggestions that the slump is showing signs of abating.

Data Released 25th April

U.K 09:30 Preliminary GDP (Q1)

EU 09:00 M3 (March)

- 3 month Moving Average

U.S 14:55 Michigan Sentiment (April Final)

written by Adam Solomon