The Pound came under severe pressure against the majors yesterday, dropping 0.4% versus the Euro and a further 0.9% against the U.S Dollar despite the Bank of England’s decision to lift UK interest rates to the highest level in six years. Recent reports have suggested that consumer spending, which accounts for a large proportion of economic growth, has continued to accelerate in the first quarter despite the BoE lifting rates on three occasions since August. In addition, robust expansion in the labour market combined with strong housing sector growth drove UK inflation to 3.1% in April, the highest in a decade. As a result, there was widespread speculation that the monetary policy committee would adopt a more aggressive policy by raising interest rates 50 basis points and the focus now will fall on the minutes from the meeting released later this month. Elsewhere, the Pound failed to find any support has a host of economic reports suggested that UK manufacturing expanded by the most in ten months in March. Factory production rose 0.6% with exports increasing by the most since August, a sign that strong growth in Europe is bolstering demand for British based goods. Earlier in the day, a separate report from HBOS plc showed that UK house price increased at the second fastest pace in nearly two years last month, which provides an indication that the Bank of England will need to continue lifting rates beyond 5.50%.
The Euro managed to claw back some gains against Sterling yesterday but came under further pressure versus a resurgent U.S Dollar as the European Central Bank kept interest rates on hold in May. The outcome of the two day meeting was widely anticipated by the market and in the accompanying press conference, the chairman of Central Bank signalled for more rate increases to come. Jean-Claude Trichet has historically used a specific tone and language in his tenure as chairman of the ECB and yesterday announced that “strong vigilance is of the essence to ensure that risks to price stability do not materialize.” In each of the past seven months prior to a rate hike, Trichet has used the exact same terminology and as a result, the Euro may continue to make gains leading up to the June announcement. The Euro-zone economy has been performing at the fastest pace in six years and concerns are still mounting that companies may increase prices and wages, which would only stoke the current inflationary pressures.
The Dollar managed to make rapid and significant gains against the Pound yesterday, crashing through the trend support at 1.9875 following the Bank of England’s decision to lift rates by just 25 basis points. The resurgence of the U.S currency came about despite a seemingly negative report from the Commerce department, which showed that America’s trade deficit had widened by more than forecast in March. The gap in goods and services trade expanded 10.4% from the previous month to nearly $64 billion as higher oil prices drove the biggest increase in imports for over four years. Nevertheless, the Dollar continued to make gains and that may continue this afternoon despite a report on U.S retail growth, which is expected to show that sales increased 0.4% in April. Consumer spending has supported economic expansion this year and further growth in the retail sector is likely to keep the Federal Reserve from cutting interest rates in the medium term. However, initial forecasts suggest that retail sales probably increased at the slowest pace in three months in April as near-record fuel prices combined with falling home values weighed on sentiment.
Data Released 11th May
U.S 13:30 Retail Sales (April)
U.S 13:30 Producer Price Index (April)
U.S 15:00 Business Inventories (March)
written by Adam Solomon
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