Daily Insight

Initially, the Dollar managed to make significant gains against both the Euro and the Pound yesterday but by the close of trading last night, the Dollar was only 0.1% higher against the single currency following a rumour that a U.S warship had been struck by an Iranian missile in the Arabian Gulf. There was a barrage of positive economic data released in the States yesterday that gave a boost to Dollar sentiment as U.S consumer prices accelerated for the first time in four months in December. The index increased 0.5%, the most since April last year, suggesting that inflationary pressures still remain and provides a further indication that the Federal Reserve will keep interest rates on hold over the coming months. Elsewhere, a separate report from the Commerce Department on the U.S housing market showed that the economy is rebounding from last year's slowdown as home starts unexpectedly rose 4.5% in December. In addition, the weekly jobless report showed that first time claims fell to an 11-month low in the week ending 13th January while manufacturing in the Philadelphia region showed signs of growth.

The Euro managed to claw back some modest gains against the Dollar last night but fell to a fresh two and a half year low versus the Pound following a distinct lack of fundamental data released in the Euro-zone. The sole release came in the shape of the ECB monthly bulletin, which largely reiterated the negative sentiment regarding future monetary policy that was expressed by the chairman, Jean-Claude Trichet last week after the ECB kept interest rates on hold at 3.5%. The tone and language used by Trichet and several other policy makers seems to have shifted away from the anticipated hike in rates next month as the Central Bank continues to monitor risks to price stability.

Sterling managed to make further gains yesterday, firming an additional 0.2% against the Dollar and climbed to the highest level versus the Euro since August 2004 despite the obvious lack of any economic data. Therefore, it seems the surprise rate increase by the Bank of England last week is still providing a boost to Sterling sentiment and the inflation report on Monday has only served to increase speculation that rates will go to 5.5% by March. The Pound may trade higher this morning following a report on UK retail sales, which is expected to rise for a third consecutive month in December as consumers stepped up spending ahead of the Christmas period.

Data Released 19th January

UK 09:30 Retail Sales (December)

U.S 15:00 Michigan Sentiment (January Prelim)

written by Adam Solomon