Daily Insight

The Pound continued to rally yesterday following a better-than-expected report from the Royal Institute of Chartered Surveyors, which showed that UK house sales had risen to highest level in two years for November. As a result, Sterling rose 0.7% against the Dollar to trade above 1.9700 overnight and a further 0.3% versus the Euro as the report fuels speculation that the Bank of England have the scope to continue raising UK interest rates next year. The focus today in terms of economic data will be the release of the minutes from the BoE's last policy meeting where the monetary policy committee elected to hold rates at 5.00%. However, will inflation well above the government's 2.0% target, the tone and language used in the statement will be crucial in identifying the possibility of a further rise in rates over the coming months. Elsewhere, Sterling may continue to make gains against the Dollar amid the release of the CBI distributive trades balance and from a technical perspective, the Pound may be on the verge of another big move versus its U.S counterpart.

The Euro received a timely boost yesterday, firming 0.6% against the Dollar as the Ifo sentiment index showed that German business confidence unexpectedly accelerated in December to the highest level since 1990. Following a decent surge in Euro-zone exports combined with increased hiring and investment this year, confidence climbed to a reading of 108.7 from November and it seems evermore likely that the German economy will be able to absorb the value-added tax increase in January. In addition, the robust growth in business confidence will only fuel speculation that the ECB will continue raising interest rates, a sentiment echoed by the chairman, Jean-Claude Trichet. After policy makers raised rates to 3.5% last month, Trichet acknowledged that the current lending rate was still relatively "low" and this mornings speech to the European Parliament will be watched closely for clues as to future policy.

The Dollar has declined against the majors this week and that trend continued yesterday despite a host of positive economic reports, which supported the view that inflation was quickening while the dramatic slump in housing may of peaked. Firstly, producer prices rose by the most since 1974 for the month of November while prices excluding the volatile food and energy gauge also rose more than expected. The index gained 2.0% last month from a 1.6% drop in October and the report will only support the Fed's view that inflation risks continue to remain a threat to economic expansion. Elsewhere, a separate report on U.S housing starts also failed to boost the Dollar as builders started work on more new homes than anticipated. Housing starts came in at an annual rate of 1.588 million last month, which was a robust 6.7% higher than the previous month although building permits dropped to a nine-year low, which suggests that weakness in construction will persist into 2007.

Data Released 20th December

UK 09:30 BoE MPC Minutes December Meeting

UK 11:00 CBI Distributive Trades Balance (December)

written by Adam Solomon