Daily Insight

The Euro managed to make modest gains against the Dollar yesterday and remained unchanged versus the Pound despite of an unexpected fall in German business sentiment in January. The Ifo index was widely expected to increase to a record level for the second month in succession but confidence declined on concern that the value-added tax increase would harm consumer spending and therefore weigh on economic growth in Europe's largest economy. However, despite the minor drop in the sentiment index, a reading above 96 indicates growth and there is strong evidence that the German economy will continue to expand this year. As a result, the Euro managed to claw back some gains against the Dollar and the single currency may receive a further boost this morning as the 3 month moving average for M3 money supply into the Euro-zone is expected to increase to 9.1% from 8.8% in November.

The Pound managed to find some support yesterday after the volatile slide on Wednesday following the release of the minutes from the BoE's last policy meeting, which has seen interest rate expectations scale back from a projected rise in February. However, with inflation still running well above target, any economic reports that show a rise in wage growth or consumer prices will rekindle speculation that interest rates can rise again next month. At the close of trading last night, the Pound was 0.2% higher against the Dollar but overnight we have traded back towards the significant support level at 1.9600 and if breached, Sterling may fall all the way back towards 1.9465.

The Dollar came under a modest amount of pressure yesterday as a report on the U.S housing market came in slightly under expectations as the sales of existing homes declined for the first time in three months. The slump in the housing sector, which has heavily weighed on U.S economic growth, has showed signs of bottoming out in recent months but the report yesterday capped the biggest annual drop in sales since 1989. Sales dropped 0.8% on the month in December while falling 8.4% in 2006 after the Federal Reserve raised interest rates 17-times over a two year period. Elsewhere, a separate report from the labour department showed that the number of initial claims in the past week rose 36,000. However, the Dollar has managed to firm an additional 0.3% versus the Pound overnight and may make further gains today ahead of a report on the sales of new homes in the States. The report is expected to show that new home sales rose for a second consecutive month, which will only provide further evidence that the housing market is improving and contribute to economic growth in the second half of 2007.

Data Released 26th January

EU 09:00 M3 Money Supply
- 3 month moving average

U.S 13:30 Durable Goods Orders (December)

U.S 15:00 New Home Sales (December)

written by Adam Solomon