Daily Insight

The uncertainty surrounding the outlook of the UK economy has weighed on Sterling sentiment in recent weeks but the Pound rose back above the 1.9800 level against the Dollar yesterday while closing well above the resistance at 1.2600 versus the Euro.

The fundamental lack of UK economic data meant that the focus switched to the declining sentiment in Europe while the modest rebound in oil prices yesterday means that the Dollar struggled to consolidate on Tuesday’s upside move.

Euro and Dollar buyers would be well placed to work a stop order in the market as the latest housing numbers indicate that the slowdown in the sector is gathering in momentum. The Nationwide house price index will follow an earlier report from the British Banker’s Association, which showed that falling home values will hamper the UK economy and weigh on consumer spending.

That sentiment may also be reflected in a report from the Confederation of British industry tomorrow with the Distributive trades balance expected to emphasise the recent dip in retail sales.

The Euro finally broke out of its tight trading range against the Pound yesterday as a spate of weak economic data undermines the ECB’s staunchly hawkish stance on inflation while policy makers seem determined to keep rates at the highest level in six years.

Business confidence in Germany and France has dropped to the lowest level in at least a decade while consumer sentiment in Europe’s second largest economy unexpectedly dropped to a record low in May.

Fuel and food prices have soared higher this year, which prompted fishermen to widen their week-long blockade of ports to the English channel this week, and reports from Morgan Stanley predict that oil will increase to $150 a barrel over the coming months.

However, the ECB are unlikely to change their stance on policy as a separate report in Germany showed that consumer price inflation rose 3.0% from this stage in 2007, compared to just 2.6% in April.

Despite the modest increase in oil prices, the Dollar rallied against the Euro yesterday following reports that U.S durable goods orders unexpectedly rose in April, signalling that the outlook for the economy may improve towards the end of 2008.

The Dollar has declined to a record low against the Euro, which is helping lower the ever-widening trade deficit, while overseas demand is helping manufacturers cope with the surging cost of raw materials.

U.S exports are keeping the economy from falling into a recession as economic growth stumbles along at the slowest pace in seven years amid the worst housing slump in nearly twenty years.

The revised estimate for U.S gross domestic product will probably confirm that the economy grew 2.6% in the first quarter while the Dollar may come under some pressure as the weekly jobless numbers indicate that the number of Americans filing for unemployment benefits increased to 375,000 last week.

Data Released 29th May

U.K 07:00 Nationwide House Prices (May)

U.K 11:00 CBI Distributive Trades Balance (May)

GER 09:00 Unemployment / Rate (May)

EU 09:00 M3 / 3 Month Moving Average (April)

U.S 13:30 Gross Domestic Product (Q1 Revised)

- Deflator

U.S 13:30 Initial Jobless Claims (w/e 24th May)

written by Adam Solomon