Daily Insight

Following on from last week, the Pound came under further pressure against the majors, falling to the lowest level since February against the Dollar, amid speculation that the Bank of England will cut interest rates by a further 25 basis points in June.

The Monetary Policy Committee, led by the governor Mervyn King, met last week and elected to keep the benchmark lending rate on hold at 5.0%. Rising inflationary concerns and a hawkish financial stability report have convinced policy makers to wait and assess the impact of three previous rate reductions while consumer prices look set to increase dramatically over the coming months.

The Pound also fell for the first week in a month against the Euro as tighter lending conditions saw the biggest drop in consumer spending in at least four years while a faltering economy may lead to a prolonged period of monetary easing.

The pessimistic outlook for the UK economy shows few signs of abating as a separate report on Friday added to recent evidence that the housing market is slowing after ten consecutive years of growth.

House prices fell 2.5% in March while courts issued the highest number of orders for home repossessions since the end of the last recession in 1992. Elsewhere, the Pound is likely to struggle against the majors in the near-term as a slowdown in manufacturing and consumer confidence fuels speculation of a June rate cut.

The focus this week will switch to the Bank of England’s quarterly inflation report on Wednesday and given the recent increase in commodity prices, the tone and language used in the statement will be heavily scrutinised for any clues on future policy.

The renewed appetite for the Euro gathered in momentum towards the end of the last week as the single currency registered gains against most of the 16 most actively traded currencies following the ECB interest rate announcement and press conference.

The Central Bank’s President, Jean-Claude Trichet, said that inflation remains the top priority over the coming months while the language used in the statement seemed to indicate that interest rates will remain on hold over the coming months.

The European Union has said recently that retail sales have fallen 1.6% over the past month while oil prices rose to a record $126 a barrel on Friday as soaring fuel prices weighs on confidence. However, the annual pace of inflation has accelerated to 3.3% in March and the latest figures are forecast to show an even bigger increase in April.

The final estimate of Euro-zone consumer prices probably rose to 3.6% in April, well above the Central Bank’s 2.0% target, and vindicate the ECB’s decision to keep interest rates steady amid the ongoing crisis in credit.

The Euro may find further support this week as a hawkish inflation report may coincide with the latest quarterly GDP numbers and the index is expected to show that activity levels are holding up reasonably well in the face of a U.S led economic slowdown.

The renewed appetite for the Dollar saw the U.S currency extend its recent run against the majors, consolidating around the highest level in two months versus the Euro while sailing through the trend support at 1.9650 against the Pound to close at the highest rate in 11-weeks.

The renewed sense of optimism surrounding the Dollar can be attributed to speculation that the Federal Reserve will leave interest rates unchanged in May after reducing borrowing costs by 325 basis points in just six months.

The daily fundamentals have painted a rather gloomy picture for the U.S economy but the Dollar found some support on Friday as the U.S trade deficit narrowed by more than anticipated in March despite a slump in overseas demand.

The Dollar’s resilience to a seemingly endless line of weak economic reports also comes in the aftermath of the G-7 meeting last month where officials outlined their concerns over the Dollar’s dramatic drop in value over the past year.

The Dollar had fallen to the lowest level on record against the Euro but in the weeks that followed the G-7 meeting, the U.S currency has advanced 3.4% from the 1.6019 low. The idea that the Dollar is stabilizing has prompted U.S and European officials to express their satisfaction over the recent upside momentum and that may see the Dollar make further gain against the majors this week.

Data Released 12th May

U.K 09:30 Producer Price Index (April)

- Output

U.K 09:30 Trade Balance / Non EU Trade (March)

U.S 19:00 Federal Budget (April)

written by Adam Solomon