Daily Insight

The Pound Rose to the highest level since February against the Euro last week but the UK currency relinquished much of the gains yesterday following a disappointing report on service sector growth.

An index of business sentiment showed that growth in UK service industries unexpectedly slowed to the weakest pace in five years in April as the turmoil surrounding credit markets hampered economic growth.

The report from the Chartered Institute of Purchasing and Supply fell to a reading of 50.4 last month, the lowest since March 2003, with a figure above 50 indicating expansion. A spate of surprisingly positive economic reports coupled with the hawkish tone of the Bank of England’s financial stability report have all but ended the prospect of a further cut in UK interest rates this month but the drop in services suggests that the Bank may need to act in June.

The Pound also declined against the Dollar in early trade, bouncing off the support at 1.9650 before a close towards the intraday high at 1.9750. The UK economy is in a period of slower growth while tighter lending restrictions will see the slump in housing lead to an inevitable slowdown in consumer spending.

However, UK consumer prices are forecast to hit 3.0% this year and rising inflationary pressures means that the Bank of England are unlikely to follow the Fed in an aggressive period of monetary easing and that may support the Pound in the short-term.

The Euro has risen for a second consecutive day versus the Dollar while the single currency also registered gains against the Pound amid speculation that the ECB will retain a hawkish stance on monetary policy and hold interest rates at the highest level in six years.

The Euro has enjoyed the biggest intraday move in two weeks against the majors as the ECB President, Jean-Claude Trichet, gave a very public reaction to the soaring price of oil. The economic outlook has soured in recent weeks as the ECB finally acknowledged that Europe is no longer immune to the credit crisis, leading to speculation that the Central will lower interest rates this year.

However, food and energy prices continue to rise and the cost of oil has remained above $120 a barrel, which means that the ECB’s accompanying statement should emphasise the ongoing risks to inflation and provide some support to the Euro.

In terms of economic data, the focus this morning will fall on European retail sales for March with the index expected to report a 0.2% increase and provide a further indication that tighter lending conditions is weighing on consumer spending.

The fragility surrounding the Dollar was exposed perfectly yesterday as the U.S currency relinquished earlier gains against the both the Pound and the Euro amid a mixture of weaker economic reports and soaring commodity prices, which threaten the pace of economic growth.

Oil prices reached another record high yesterday, surging past $122 a barrel, as rising producer costs stoke inflation and a provide a difficult balancing act for the Federal Reserve. Although the Dollar is still 3% higher against the Euro from this stage in April, the prospect of the U.S currency extending its rally beyond the current level looks increasingly unlikely.

A number of major U.S banks are reporting massive first quarter deficits as the Washington based company, Fannie Mae, said that its credit market losses will be worse next year than in 2008 after rocketing to a larger than forecast $2.19 billion.

The world’s biggest banks and securities firms have slashed 65,000 jobs in the past 10 months and the latest revelation has prompted speculation that the Fed will have to continue lowering interest rates beyond the current 2.0%.

Data Released 7th May

UK 09:30 Industrial Production (March)

- Manufacturing Output

EU 10:00 Retail Sales (March)

GER 11:00 Industrial Orders (March)

U.S 13:30 Labour Costs (Q1)

- Productivity

U.S 15:00 Pending Home Sales (March)

U.S 20:00 Consumer Credit (March)

written by Adam Solomon