Daily Insight

The Pound made some unlikely gains against the Euro yesterday and also enjoyed a large intraday move versus the Dollar after an industry report showed that UK producer prices rose at the fastest annual pace since 1991.

UK factory gate inflation climbed 6.2% from this stage in 2007, compared with 5.9% in February and the report only serves to emphasise the overwhelming increase in the cost of raw materials and adds to concerns that faster inflation will become entrenched in the economy.

Food and energy costs have risen to a fresh record high this year and the report yesterday suggests that factories will put pressure on consumer prices and that will be of particular concern to policy makers.

The Bank of England lowered the benchmark lending rate to 5.00% last week in an attempt to shelter the economy from its worst year of economic growth in 16-years.

Just last month, the governor of the BoE, Mervyn King, said that inflation is likely to exceed the government's 2.0% target in the coming months while the report yesterday may yet have a bearing on monetary policy and may even dictate the timing of the next reduction.

The Pound rebounded from the lowest level on record versus the Euro and snapped a two day losing streak against the Dollar as the focus switches to the CPI report this morning.

The Euro endured a day of mixed fortunes yesterday as the impact of the G-7 summit had an unexpected influence on the market, which saw the single currency relinquish some of its gains against the Pound.

The Euro also opened lower versus the Dollar yesterday as the statement that followed the meeting showed that G-7 members were concerned with volatile currency fluctuations and see the overwhelming strength of the Euro as a threat to the global economy.

The Euro has risen 9% in value against the Pound in the last four months alone and the only realistic prospect of redressing the balance would be for the ECB to be persuaded into a series of rate cuts.

The Central Bank has remained staunchly hawkish throughout the credit market turmoil while the Federal Reserve and the BoE beginning a period of easing.

The sharp contrast in policy can be attributed to the Euro's momentous appreciation and the upward swing in inflation while further gains are likely in the short-term amid specualtion that the ECB will refrain from cutting interest rates until the end of the year.

The dwindling sentiment surrounding the U.S economy has prompted the Federal Reserve to begin an aggressive period of monetary easing and the decisive drop in U.S consumer confidence will probably lead to a further quarter-point reduction this month.

The Dollar failed to rally yesterday despite a surprisingly positive report from the Commerce Department, which showed that retail sales rose in March, reflecting the dramatic increase in fuel prices.

Sales jumped 0.2% last month but the overall sentiment suggests that spending, which accounts for two thirds of the economy, is waning and will continue to stagnate as property values tumble and the jobless rate creeps higher.

Nevertheless, the Dollar may continue to decline as the focus switches to the latest round of inflationary data but even a sharp rise in factory prices won't prevent another rate cut this month.

Data Released 15th April

UK 09:30 Consumer Price Index (March)

- RPI

UK 09:30 DCLG House Price Index (February)

GER 10:00 ZEW Expectations Balance (April)

U.S 13:30 Producer Price Index (March)

U.S 13:30 Empire State Index (April)

U.S 14:00 Net Capitla Inflows - TICS (February)

U.S 18:00 NAHB Housing Market Index (April)

written by Adam Solomon