Daily Insight

It was a mixed day for the Pound yesterday, declining modestly against the Euro but gaining 0.1% versus the Dollar following the release of the minutes from the Bank of England's last policy meeting where the nine-strong committee voted unanimously to keep UK interest rates on hold at 5.0%. The current benchmark rate is at the highest level in five years and the minutes yesterday seemed to suggest that growth in wages and personal income may keep inflation well above target over the coming months. However, the MPC also highlighted that inflation would fall back in the longer-term and peak at 2.8% over the next few months, which perhaps explains why the Pound came under a little pressure against the majors. In a separate report, Sterling found further support as the Confederation of British Industry released their monthly survey, which showed that retail sales rose to the highest level in two years through December. In terms of economic data, the Pound may come under some pressure this morning as the UK current account balance is expected to show the deficit widening in the third quarter. While a separate report on UK gross domestic product may show that growth in the economy came in unchanged in the final estimate for the third quarter at an annual rate of 2.7%.

The Euro traded fractionally higher against Sterling yesterday and also rose modestly versus the Dollar after the chairman of the ECB gave a speech to the European Parliament's economic affairs committee. Jean-Claude Trichet, who has been rather reserved in the past month regarding future policy, highlighted the upside risks to higher inflation and indicated that Euro-zone interest rates are set to continue rising into 2007. The Central Bank has forecasted that European inflation would remain well above the 2.0% target into next year despite six rate increases over the past 12 months. The main catalyst to a disruption in price stability would be the increased volatility in the oil market combined with demands for higher wages.

The Dollar continued to decline yesterday amid a sparse supply of economic data despite a dramatic increase in producer price inflation earlier this week. However, there is a host of significant data released this afternoon with the focus falling on the final estimate for U.S GDP in the third quarter. The report is expected to show that the economy expanded at the slowest pace in well over a year in the three months to September following a dramatic slump in housing and manufacturing this year. In addition, a separate report from the labour department may show that the number of people out of work and claiming benefits actually rose to 315,000 over the last week.

Data Released 21st December

UK 09:30 Final GDP (Q3)
UK 09:30 Current Account Balance (Q3)

U.S 13:30 Final GDP (Q3)
- GDP Deflator

U.S 13:30 Initial Jobless Claims (w/e 16 December)
U.S 15:00 Leading Indicators (November)
U.S 17:00 Philly Fed Index

written by Adam Solomon