Following on from last week, the Pound managed to remain fairly unchanged against the majors on Friday after dropping significantly versus the Dollar following the Bank of England’s decision to lift interest rates by just 25 basis points. In terms of economic data, the Pound received a timely boost on Friday as a report from the National Institute of Economic and Social Research showed that the UK economy expanded at 0.7% in the first quarter. Economic expansion matched the same pace as in the final three months of 2006 following the dramatic increase in service sector growth, which accounts for two thirds of UK gross domestic product. In a statement released last week, the BoE said that economic growth is ‘firm’ while upside risks to inflation remain, which provides an indication that the Central Bank intends to lift rates further this year. The focus this week will fall largely on the quarterly inflation report, which should provide an insight into last week’s much anticipated rate increase. While elsewhere, the monthly consumer price index should reiterate upward inflationary pressures as retail price inflation moderates slightly from a decade high in March although a hawkish report should be supportive of the Pound.
The Euro has managed to continue making modest gains against Sterling as the European Central Bank gave a firm indication that Euro-zone interest rates are set to rise next month. The positive sentiment surrounding the single currency is likely to gather momentum this week as the ECB monthly bulletin is expected to reiterate the hawkish tone of the press conference, cementing an interest rate hike to 4.00% in June. Elsewhere, the final estimate of the harmonised consumer price index will be released later this week and is expected to show that the annual rate of inflation stayed below the Central Bank’s 2.0% ceiling for the sixth consecutive month. The tone of the recent statement from the chairman, Jean-Claude Trichet, seemed to indicate that rates will peak in the near-to-medium term as inflation continues to fall over the coming months. In terms of economic data, the Euro may come under modest pressure this morning as a gauge of industrial activity in the Euro-zone may show that production dropped in March. The Euro has risen to a record high versus the Dollar in recent weeks and that should weigh on factory output as Euro-zone exports become less attractive to foreign investors.
The resurgence of the U.S Dollar continued to gather momentum last week, closing under the trend support at 1.9875 versus the Pound and also consolidating on recent gains made against the Euro. Dollar buyers would be well placed to work a stop order in the market to protect against any further downside movement despite a host of seemingly damaging economic reports. Growth in the U.S retail sector unexpectedly slowed in April with sales dropping 0.2% from the previous month as higher fuel prices and falling home values weighed on sentiment. The report will heighten concerns that a drop in consumer spending, which accounts for over two thirds of the economy, would continue to slow economic growth. Elsewhere, the Dollar remained firm as a separate report from the labour department showed that U.S wholesale prices rose just 0.7% last month. Excluding the volatile food and energy gauge, producer prices remained unchanged for a second consecutive month in April and the figures point to a gradual easing of price pressures, which will allow the Federal Reserve to keep interest rates steady.
Data Released 14th May
UK 09:30 DCLG House Prices (March)
UK 09:30 Producer Price Index (April)
– Core output
EU 10:00 Industrial Production (March)
written by Adam Solomon
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