Following on from last week, the Dollar continued to decline against the majors, dropping to a three month low versus the Euro as recent reports provide fresh concerns of slowing U.S economic growth. On Friday, the University of Michigan’s preliminary index of sentiment showed that U.S consumer confidence fell this month following an increase in fuel prices while U.S stocks fell by the most in four years. The sentiment index fell to a reading of 88.8 in March, which represents the lowest figure since September last year and it seems that consumer spending, which accounts for a large proportion of economic growth, will continue to slow in pace this year. Elsewhere, a separate report showed that higher fuel prices have managed to push U.S inflation higher over the last month, which will keep the Federal Reserve on red alert ahead of the monthly FOMC rate announcement on Wednesday. Consumer prices rose 0.4% in February following a more modest 0.2% increase the previous month and persistent inflationary pressures means the chairman of the Fed, Ben Bernanke, will find it difficult to signal an interest rate cut when policy makers meet this week. Therefore, it is widely anticipated that U.S interest rates will remain on hold in March but it is beginning to look increasingly likely that the Fed will cut rates up to three times this year as the slump in the housing sector continues to threaten the pace of economic growth.
The positive sentiment surrounding the Euro continued last week as the single currency made widespread gains against both the Pound and the Dollar despite a particularly sparse week in terms of economic reports. The Euro has risen to the highest level against the Pound since August last year over the past week and from a technical perspective, it now looks very likely that we will continue to fall through the support level at 1.4600. There is a distinct lack of economic data released in the Euro-zone this week and the focus will fall on Jean-Claude Trichet’s testimony to the EU Parliament on Wednesday where the chairman of the ECB may give some insights into the future outlook for monetary policy. Elsewhere, the German consumer price index may provide an indication of inflationary pressures in Europe’s largest economy, which may prompt the ECB to raise rates for the eighth time in this tightening cycle as early as May.
The Pound has made significant gains against the Dollar over the past week as the technical outlook seems to suggest we may head higher still ahead of a key week in terms of economic events. However, the Pound has come under renewed pressure versus the Euro as Sterling proves to be more sensitive to the unwinding of UK carry trades with Japan than it’s European counterpart. The focus this week in terms of economic reports will fall on the release of the minutes from the Bank of England’s last policy meeting where the committee elected to hold UK interest rates at 5.25%. It is possible that two members of the 9-strong panel voted to raise rates by a further quarter-point this month but the tone and language used in the minutes will be heavily scrutinized for any indication of a further rise in rates over the coming months. Meanwhile, the release of the February consumer price index tomorrow should prove pivotal as UK inflation is expected to exceed the BoE’s 2.0% target for a 10th consecutive month. Consumer prices are expected to remain relatively unchanged at 2.7% year-on-year in February but the retail price index, which may prove more influential in shaping consumer price expectations, is expected to rise modestly from 4.2% in January. RPI inflation has doubled in the past year to the highest level since 1992 and if the figures exceed 4.2% last month, we can expect the Pound to strengthen as it will look very likely that UK interest rates will rise for a fourth time since last August.
Data Released 19th March
U.S 17:00 NAHB Housing Market Index (March)
written by Adam Solomon
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