Daily Insight

The Pound rallied to the highest level in over a month versus the Euro yesterday, closing well above the 1.2700 level last night as the declining sentiment surrounding the European economy offsets the dramatic fall in the Nationwide house price index.

UK home values fell by the most since records began in 1991 as tighter credit conditions forced lenders to withdraw some of their best offers and starved the property market of buyers. The average cost of a home in Britain dropped 2.5% from April, the biggest monthly decline in 17-years, while prices fell 4.4% from this stage in 2007.

However, the Bank of England can’t afford to reduce interest rates at the present time despite warnings from the Governor, Mervyn King, that home values will fall further over the coming months and increase the risk that the economy will stall.

The Pound fell 0.3% against the Dollar yesterday, briefly trading under 1.9700 in early trade as the house price index coincided with a recent statement from the British Bankers’ Association, who said that mortgage approvals plunged 39% from this stage in 2007.

In addition, the Pound may come under further pressure this morning as the recent drop in retail sales may be reflected in the Gfk consumer confidence survey.

The negative tone of recent economic reports outside of Germany has weighed on Euro sentiment this week as French consumer confidence fell to a record low and offset the surprising resilience in the German labour market.

Inflation in Europe’s largest economy also increased faster than expected in April with consumer prices rocketing above 3.0% following the record increase in commodity prices. Nevertheless, an index of European retail sales showed that growth in the sector increased for the first time in three months in May after plunging to a record low the previous month.

The gauge of sales growth rose to 53.1, the biggest month-on-month increase in a year, while the survey vindicates the ECB’s refusal to lower interest rates and focus on the upside risks to inflation.

However, the Euro continued to decline against the Pound yesterday and also recorded modest losses versus the Dollar as the overall tone of recent economic data indicates that cracks are appearing in the Euro-zone economy.

The Dollar rallied against most of the 16 most actively traded currencies yesterday as U.S stocks gained, oil prices retreated and speculation increased that the Federal Reserve will raise interest rates by the end of the year.

The U.S currency rose to the highest level in three weeks against the Euro after the Commerce Department reported a 0.9% increase in the annual pace of economic growth.

The revised estimate of first quarter gross domestic product grew more than initial forecasts as a weak Dollar helped U.S exports climb to a record level but the number of Americans filing for jobless benefits rose to a four year high.

Nevertheless, the Dollar found some support after Federal Reserve Bank of Dallas President, Richard Fisher, said that the governing council would need to raise interest rates from the current 2.0% if consumer prices continue to accelerate at the current pace.

Data Released 30th May

U.K 10:30 Gfk Consumer Confidence (May)

EU 10:00 EC Business Climate (May)

EU 10:00 EC Economic Sentiment (May)

- Consumer / Industrial / Services

EU 10:00 Harmonised Consumer Price Index (Flash May)

EU 10:00 Unemployment (April)

U.S 13:30 Personal Income / Consumption (April)

- Core PCE

U.S 14:45 Chicago PMI (May)

U.S 14:55 Michigan Sentiment (May Final)

written by Adam Solomon