The Pound made gains versus the Euro and the Dollar yesterday even though UK Retail-Sales index released yesterday fell for the first time in 3 months ,as well as Public Sector Borrowing Figures, which disappointed the market.
Also to note, inflation pressure is still at an undesirable 4.5% in April from a year earlier, it will be key to know more about UK current struggling growth pace today. The release of UK GDP of Q1 is expected to show growth up by 0.5% after shrinking by 0.5% in Q4 2010.
The Dollar declined against the Pound and the Euro as investors booked profits after yesterday’s broad gains. Divergent US economic data has also encouraged investors to seek assets other than the dollar. New Home Sales beat expectations, registering a 7.3% gain from last month, versus the flat reading that was anticipated. However, the Richmond Fed Manufacturing Index missed the mark, registering -6, versus the expected reading of 9, and down sharply from last month’s reading of 10. While the positive housing data is welcome news as the housing market has been a particularly weak spot for the economy, the unexpected slowdown in manufacturing output in the Mid-Atlantic region is a disappointing development. Until recently, manufacturing had been one of the best performing parts of the economy, but the weak Richmond report, and similarly disappointing reports from the Philadelphia and New York region are troubling.
A recovery in equities and commodities have however encouraged investors to seek higher-yielding assets, as the market’s focus shifts back towards interest rate differentials. Encouraging economic data out of Europe has investors again adding to bets that the ECB will hike rates again before the Fed moves to tighten policy.
The Euro declined against the Pound while making gains against the Dollar after a report showed that German business confidence remained near a record high.
The Ifo Institute in Munich Germany said today that its business climate index, based on a survey of 7K business executives, held at 114.2, above the expected 113.7, and down only slightly from last month’s 115.4.
Despite a fractured Eurozone economy, investors still expect that the ECB will have room to raise interest rates further in the coming months, as long as the region’s core economies continue to perform well. A fresh wave of credit rating downgrades for the region’s periphery emboldened EUR bears yesterday as debt “restructuring” or “reprofiling” appears inevitable for Greece, Portugal, Ireland and possibly even Spain and Italy. Nevertheless, the common currency’s yield advantage will keep it well supported in the near term, barring any defaults.
Data released 25.05.2011
UK 09.30 Revised GDP (Q1)
US 13.30 Durable Goods (April)