Daily Insight

The Pound has been under real pressure against the majors this week and the UK currency plummeted through the trend support at 1.9650 against the Dollar to close last night at the lowest level in nearly three months.

The Pound also fell for a third straight day against the Euro after an industry report showed that UK consumer confidence declined to the weakest in at least four years last month. According to the report from the Nationwide Building Society, an index of consumer sentiment fell to the lowest level since the survey began in May 2004 and speculation has intensified that the Bank of England may bring forward their next interest rate reduction.

In addition, the Pound extended its losses versus the majors after a separate report from the Office of National Statistics showed that UK manufacturing unexpectedly declined in March. Factory output fell 0.5% from the previous month as the turmoil in credit markets swept through the economy, while higher commodity prices and a weaker currency means that inflation will probably exceed the Bank’s 2.0% target for the remainder of 2008.

Renewed concerns over inflation has coincided with the price of oil rocketing through $122 a barrel and the recent commentary from a number of MPC officials suggests that policy makers will resist cutting rates this afternoon with the next likely move coming in June.

The Euro traded in a very tight trading range against the Dollar yesterday but the single currency may resume its recent downward trend amid speculation that the ECB will focus on the downside risks to economic growth and soften their stance on inflation.

A spate of negative economic indicators has paved the way for the Central Bank to begin a period of monetary easing as cracks begin to appear in the Euro-zone economy after the fallout from the seizure in credit markets.

However, consumer prices have remained well above 3.0% over the past four months and with commodity prices climbing to record highs in recent weeks, policy makers will have little choice but to keep rates on hold at 4.0%

The European Central Bank face a difficult balancing act in the month’s ahead and the Euro has been under pressure as traders speculate on the timing of the first interest rate cut. In terms of economic data, European retail sales plunged 1.6% in March to record the biggest monthly decline since records began in 1995 as consumers struggled with record high food and fuel prices. The latest report from the European Union only compounds economists worst fears and indicates that the economy is slowing under the weight of a U.S led economic slowdown.

The revival in Dollar sentiment gained in momentum yesterday as the U.S currency rose to the highest level since February against the Pound amid suggestions that the Federal Reserve will keep interest rates on hold in May.

Despite another decline in pending home sales, the Dollar shrugged off a host of weak economic reports to record gains against the majority of the 16 most actively traded currencies. As the focus switches to events in the U.K and Europe today, the Dollar may continue its upside momentum in the near-term amid suggestions that the worst of the credit crisis is over.

Data Released 8th May

U.K 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 3rd May)

U.S 15:00 Wholesale Inventories (March)

written by Adam Solomon