Daily Insight

Following on from last week, the Pound has gained in momentum against the Euro, breaching the 1.2800 barrier on Friday, to record a third weekly advance against its European counterpart amid speculation that the worst of the credit crisis is over and a rebound in risk appetite will return to the market.

The FTSE 100 index has continued its longest run of gains since October and the Pound rallied after the Bank of England’s financial stability report showed that policy makers were becoming increasingly optimistic that the worst of the credit crunch is behind us.

The tone and language used in the statement suggests that a divided Bank of England will resist cutting interest rates this week with a possible 25 basis point reduction in June. The short-term momentum surrounding the Pound has seen the UK currency rise to the highest level since February against the Euro but the prospects of this rally extending beyond the current levels largely depend upon a break above 1.3000.

However, the recent economic figures supports the view that the UK economy is still in trouble and the latest housing numbers showed that prices have posted the first annual decline since 1996, while construction contracted to the lowest level in a decade.

The tentative price action surrounding Cable has seen the Pound struggle to stay above 1.9900 against a resurgent U.S Dollar but the focus will switch to the Bank of England interest rate announcement on Thursday.

The prospects of the MPC keeping rates on hold has heightened significantly since the Bank’s financial stability report and we may have to wait for the quarterly inflation numbers or the minutes of the meeting released later this month for any further indication of policy.

The Euro has been susceptible to a spate of weakening economic reports while concerns are growing within the ECB that the U.S led economic slowdown will spread throughout the Euro-zone economy, leading to an inevitable cut in interest rates.

The single currency rallied to a record high versus the Dollar last month but on Friday the Euro had declined to the lowest since February and made widespread losses against most of the 16 most actively traded currencies.

European manufacturing fell for a third straight month in April as the credit crunch sapped global demand while a strong Euro and rising commodity prices means that manufacturers have little choice but to pass on higher costs to the consumer.

Industrial production is faltering and overseas demand has declined while the Euro’s 6% gain in value against the Dollar is making European exports less competitive. The ECB’s governing council are due to convene this Thursday and the members are expected to keep rates on hold, while the accompanying statement should be hawkish in tone considering that inflation remains well above the Central Bank’s 2.0% target.

The shift in sentiment surrounding the economy has seen the Dollar extend its recent run against the Euro in recent weeks but the U.S currency weakened across the board yesterday despite an unexpected surge in service sector growth.

The Institute of supply Management released its monthly index of non-manufacturing companies, which unexpectedly grew for the first time since December. The report is just the latest indication that the U.S economy is weathering the credit crisis and the downturn in job growth while a jump in retail sales later this month would give the Federal Reserve the premise to keep interest rates unchanged in May.

The Dollar’s failure to rally in the aftermath of the report yesterday coincided with the price of oil skyrocketing to the highest level on record at $120 barrel as news filtered through of an attack on a Nigerian oil station, while a rebound in service sector growth signals increased demand for energy use.

Data Released 6th May

U.K 09:30 CIPS Services PMI (April)

EU 09:00 Services PMI (April)
EU 10:00 Producer Price Index (March)

written by Adam Solomon