Daily Insight

Following on from the last week, the Dollar made substantial gains against Sterling amid a barrage of positive economic reports, which has shifted expectations away from an interest rate cut early this year and dimmed speculation that the dramatic slowdown in the property market will lead the U.S economy into recession. The support level at 1.9300 versus the Pound was breached on Friday following a stronger-than-expected employment report, which showed that the U.S economy added 167,000 workers to payrolls last month, the highest monthly increase since April last year. The U.S job report has added to recent evidence that the economy will be able to weather the slump in housing and manufacturing this year and that has prompted the Federal Reserve to adopt a neutral stance with regards monetary policy over the first quarter. In terms of economic data, the Dollar may find further support this week with the focus falling on the U.S retail sales report on Friday, which is expected to show growth at 0.6% on the month. While elsewhere, the monthly U.S trade balance may show that the deficit in goods and services actually widened in November, although not to a degree that is expected to weigh on Dollar sentiment.

The Pound came under intense pressure against the Dollar last week despite a string of positive economic data with UK mortgage approvals rising to a three-year high and growth in the service sector at the highest rate in nearly 11-years. That has prompted increased speculation that the Bank's monetary policy committee intend to lift UK interest rates by a further quarter-point over the coming months. However, the BoE are not expected to lift rates in the monthly announcement this Thursday and we will have to wait until the 18th of December and the release of the minutes of the meeting to gain an insight into the likelihood of a February rate increase.

Initially, the Euro made gains against both Sterling and the Dollar but following a surprisingly negative report on the European service sector, the single currency fell back towards 1.4850 versus the Pound by the close on Friday. The focus this week will undoubtedly fall on the ECB interest rate announcement on Thursday and although policy makers are expected to leave rates on hold this month, the accompanying press conference should provide an insight into future policy. In recent statements, the chairman of the ECB, Jean-Claude Trichet, has reiterated that the Central Bank will monitor very closely the current risks to price stability and therefore the language and tone of the press conference will be heavily scrutinized. However, taking into consideration the recent strength of economic reports there is a strong possibility that Trichet will use the terminology, "strong vigilance" to signal a further rate hike in February and that will provide a much needed boost to the Euro.

Data Released 8th January

GER 11:00 Manufacturing Orders (November)

U.S 20:00 Consumer Credit (November)

written by Adam Solomon