Daily Insight

Following on from last week, the Dollar continued to rally against the majors, gaining a further 0.3% versus the Euro and dropping through the major support level at 1.9600 against the Pound following yet another band of positive economic data. A report from the Commerce department showed that the sales of new homes rose by more than anticipated in December, which will only further speculation of a rebound in the housing market following the biggest slump in more than 17-years. The significance of the report will rekindle concerns that the Federal Reserve have the capacity to raise U.S interest rates over the coming months after adopting a neutral stance earlier this month. Therefore, the focus this week will fall heavily on the FOMC rate announcement on Wednesday and although rates are expected to stay unchanged at 5.25%, the tone and language used in the accompanying statement will be heavily scrutinized. Elsewhere, the Dollar may continue to rise against the majors ahead of the monthly U.S job report this Friday as it is widely anticipated that the economy added 145,000 jobs to payrolls in January with unemployment unchanged at 4.5%.

Over the past week, the Euro managed to hold steady against the Pound after falling to a fresh four-year low on Tuesday but continued to decline against the Dollar following a distinct lack of economic data released in the Euro-zone. Although, the single currency failed to make any gains on Friday despite a report showing that money-supply growth into the Euro-region accelerated at the fastest pace in almost 17-years, which signals persistent inflation concerns that may force the ECB to continue raising interest rates. Therefore, the focus this week in terms of economic data will be the initial estimate for Euro-zone inflation, which is widely expected to rise back above the 2.0% target year-on-year in January as the VAT increase in Germany has a negative impact. As a result, the Euro may make some gains against the majors as the chances rise of a further rate increase in March.

The Pound rose to the highest level against the Dollar since September 1992 last week and also achieved a fresh four-high versus the Euro prior to a report from the Bank of England, which showed that the committee was split 5-4 in favour of raising interest rates in January. As a result of the indecision within the MPC, Sterling fell considerably against the Dollar as the chances of a back-to-back rate increase in February was scaled back although we still anticipate a further quarter-point rise in March. There is a distinct lack of economic data released in the UK this week with the focus falling on UK mortgage approvals tomorrow, which is expected to drop to 127,000 in December as the previous rate increases from the BoE take effect. However, Sterling has failed to make any gains this morning despite a report from Hometrack, which showed that UK house-price inflation reached the fastest pace in over three years this month. Prices in the London area specifically rose 0.8% from last month while growth in the rest of the country increased 0.3%.

Data Released 29th January

UK 11:00 CBI Distributive Trades Survey (January)

written by Adam Solomon