Daily Insight

Following the fundamental lack of UK economic data released yesterday, the Pound took advantage of broad Dollar weakness to record the biggest intraday rally in over a month and close above 1.9600 last night.

The UK currency also made significant gains against the Canadian and Australian Dollar as the market began to absorb the Bank of England’s quarterly inflation report and traders scaled back the probability of an interest rate cut in the foreseeable future.

The minutes from the Central Bank’s last policy meeting are released this morning and the focus will fall on the voting pattern of the nine-strong committee while policy makers are expected to be divided in their decision to keep interest rates unchanged in May.

The Pound’s unexpected and short-term upside momentum is unlikely to see the UK currency extend its rally much beyond the current levels and it is no coincidence that the move against the Dollar coincided with the sharp spike in the price of oil.

The Euro has remained in a tight trading range against the Pound this week but the single currency rose above 1.5600 versus the Dollar yesterday and may set a new record high over the coming months as a report from the Bank of Tokyo-Mitsubishi showed that surging global trade will support the world economy and keep the ECB from cutting interest rates.

The Euro rose 1.1% against the Dollar by the close last night and reached the highest level in nearly a month despite separate reports that German investor confidence unexpectedly fell for a second month in May.

The ZEW index showed that investor and analyst expectations declined to the lowest level in 15-years as rising inflation, a strong Euro and the impact of the credit crunch compromises the outlook for economic growth.

However, the ECB are reluctant to change their stance on monetary policy after a report yesterday showed that German producer prices accelerated at the fastest pace in nearly two years last month as the rising cost of raw materials add to concerns over inflation.

The volatile price action surrounding the Dollar yesterday saw the U.S currency record sharp losses against both the Pound and the Euro as the price of oil rocketed to a fresh record high at $129.60 a barrel.

The correlation between escalating crude oil prices and the decline in Dollar sentiment is becoming increasingly apparent and the sharp move yesterday can be attributed to comments from the billionaire hedge-fund manager, Boone Pickens, who said that oil will reach $150 a barrel this year.

The dramatic increase in commodity prices has derailed the Dollar’s upside move for the time being but a report from the U.S labour market yesterday showed that factory prices rose almost twice as much as initial forecasts.

The gauge of inflation shows that a slowing economy is making it difficult for manufacturers to pass on the rising cost of raw materials to the consumer, although prices have risen by the fastest annual rate since 1991.

Rising inflationary pressures means that the Federal Reserve are unlikely to cut interest rates beyond the current 2.0% and that sentiment was emphasised in a statement yesterday by the Vice Chairman, Donald Kohn, who said that the economy should strengthen as the Fed’s aggressive easing of rates is absorbed.

Data Released 21st May

U.K 09:30 BoE MPC Minutes (7/8 May)

U.K 09:30 PSNCR (April)

U.S 19:00 FOMC Meeting Minutes (29/30th April)

written by Adam Solomon