Daily Insight

The Pound has been making steady gains against the Euro over the past week and the UK currency climbed to the highest level in more than an a month yesterday after the Bank of England released its semi-annual financial stability report.

The tone and language used in the statement signalled that the worst of the UK credit crisis may be over and the Pound subsequently rallied against the Euro as the Central Bank added that “risk appetite will return gradually in the coming months.”

The optimistic commentary from the Deputy Governor of the BoE, John Gieve, almost mirror yesterday’s comments from U.S Treasury Secretary Henry Paulson, who said that the credit crisis may be more than half over and that confidence was slowly returning to the market.
The recent revival in Sterling sentiment was extended further as a separate report from the Chartered Institute of Purchasing and Supply showed that its UK producer price index rose to the highest level on record.

The price of oil has risen to a high of $119 a barrel in recent weeks and the cost of food has also risen to record levels, forcing manufacturers to pass on higher prices to the consumer and stoke inflation.

UK consumer prices are forecast to hit 3.0% later this year and with the Bank of England more upbeat about the prospects of a recovery, the chances of a back-to-back interest rate cut in May is looking less likely by the day.

The Euro is poised to record a weekly loss against the Dollar after falling to the lowest level since February yesterday and the single currency may continue to struggle today as German retails sales are expected to reflect a sharp deterioration in consumer sentiment.

The Purchasing Managers’ Index on European retail growth contracted for the first time this year while a strong currency, record high oil costs and tightening credit conditions means that the ECB may be pressurised into cutting interest rates before the turn of the year.

The Dollar rose to the highest level in over a month against the Euro yesterday and also registered gains versus Sterling as the fallout from the FOMC rate decision provoked speculation that the Federal Reserve will stop cutting interest rates and enter a period stability.

The Fed have cut rates from 5.25% to 2.0% in an aggressive period of monetary easing but the accompanying statement on Tuesday showed that two policy makers actually elected to keep interest rates on hold this month while an entire text on the downside risks to growth was removed altogether.

The renewed sense of optimism shown by the Fed has led many economists to believe that the worst of the credit crisis is over while the Dollar actually rose 1.1% against the Euro yesterday, matching the strongest level since March 25th.

In terms of economic data, the Dollar also found further support yesterday as U.S consumer spending rose above initial expectations in March, underling an emerging threat of inflation. The Fed’s preferred measure of inflation accelerated 0.4% from the previous month while a separate report from the Labour Department showed that claims for unemployment benefits rose by more than forecast last week.

The number of jobless claims soared to the highest level since April 2004 and the report may provide a little insight into Non-Farms this afternoon, which is expected to show that the unemployment rate increased to 5.2%.

Dollar buyers would be well placed to work a stop order in the market prior to the announcement because a larger than expected increase in payrolls could spark a Dollar rally and increase speculation that the Fed have done their job in shoring up the future outlook of the economy.

Data Released 2nd May

U.K 09:00 Manufacturing PMI (April)

U.S 13:30 Non-Farm Payrolls (April)
- Average Earnings / Unemployment
U.S 15:00 Factory Goods Orders (March)