Daily Insight

Following on from last week, the Pound rose to the highest level in almost a month versus the Dollar after oil prices peaked at a record $135 a barrel while a smaller than expected decline in UK retail sales prompted speculation that the economy will pull through the credit slump.

The dramatic increase in energy prices has seen consumer price inflation breach the government’s 3.0% limit in the past month and subsequently the Bank of England will have little choice but to keep interest rates on hold for the time being.

The Market holiday in England and the U.S means that there was little activity but the Pound came under some pressure after an industry survey showed that house prices declined for an eighth straight month in May.

According to the report from Hometrack Ltd, the average cost of home in Britain slipped a further 0.5% this month and a recent statement from the BoE Governor, Mervyn King, indicated that home values are likely to continue to decline over the coming months.

The Bank of England can’t afford to reduce interest rates while tighter lending conditions have forced lenders to increase mortgage rates and even withdraw some of their best offers altogether.

The Pound dropped to an intraday low of 1.9772 before bouncing back above 1.9800 by the close of trading last night but the resolve in Sterling will be tested this week amid further reports on falling house prices and weakening consumer sentiment.

The Euro has remained within a tight trading range against the Pound but the single currency took advantage of broad Dollar weakness to rise to a near month high yesterday amid a packed week of European economic indicators.

Preliminary estimates for the German economy showed that growth remained resilient in the first quarter despite a strong Euro and slowing demand for European based exports. Elsewhere, the EC sentiment index is expected to show that industrial and consumer confidence declined modestly in May but rising commodity prices means that inflation probably jumped to 3.5% from April.

The Dollar has struggled against the majors recently despite the sharp shift in tone among many economists who believe that the U.S economy is through the worst of the credit crisis and the Federal Reserve can keep interest rates steady after an aggressive period of easing.

However, the dramatic increase in oil prices correlates with the Dollar’s decline and crude oil rallied for a second day amid reports of a militant attack in Nigeria while OPEC’s president ruled out an increase in supplies to provide some much needed relief to the market.

Elsewhere, the Dollar may come under pressure as a report this afternoon is expected to show that the housing slump deepened and consumer confidence fell to the lowest level in 15-years .

Data Released 27th March

GER 07:00 Gross Domestic Product (Q1 Details)

U.S 14:00 Case / Shiller House Prices (March)

U.S 15:00 Consumer Confidence (May)

U.S 15:00 New Home Sales (April)

written by Adam Solomon