Daily Insight

My apologies for the lack of market updates over the past few days, I have been off work with a virus. Although, some might call it man-flu, normal service will now be resumed.

Following on from a turbulent week, the Pound continues to make widespread gains against the majors following the Bank of England's surprise decision to lift UK interest rates last Thursday. It was widely anticipated that the Monetary Policy Committee would keep rates on hold in January with the general consensus pointing towards a probable rise in February. However, following the third quarter-point increase since August last year, the BoE released a statement, which highlighted persistent inflationary concerns that will in turn lead to higher wage demands. In the previous gauge of consumer price inflation, the index showed a rise of 2.7% year-on-year in November, which is the fastest rate in over 10-years. This week, the focus in terms of economic data will be the CPI index for December, which is expected to show that UK inflation accelerated from 2.7% to 3.1% - the highest level since August 1992. That will perhaps explain why the MPC elected to hike rates early and increases speculation that interest rates may go up again in the not too distant future.

The capitulation of the Euro last week was a combination of the surprise rate increase from the Bank of England and the unexpectedly dovish remarks from the chairman of the European Central Bank. The Euro has dropped to the lowest level against the Pound in over 2-years following the ECB's decision to keep their benchmark interest rate on hold at 3.5%. However, although the no change in monetary policy was widely expected, the accompanying press conference didn't deliver the sort of positive tone that would signal a probable hike in rates in February. However, the chairman, Jean-Claude Trichet used the same language as the previous statement and seemed to suggest that the committee would monitor the affects to price stability over the next month but neglected to used the 'magic words' "strong vigilance". Therefore, the particularly soft tone of the statement will scale back the possibility of a further rate increase next month and that provides an obvious insight into the weakness of the Euro.

The Dollar remained relatively firm last week, falling back towards 1.9500 against the Pound in light of the BoE's decision to lift interest rates but made robust gains versus the Euro. A surprisingly strong report on the U.S labour market showed that the number of first time claims for state unemployment benefits actually fell by much more that expected in the week ending January 6th to the lowest level in five months. In addition, a separate government report showed that U.S retail sales rose by 0.9% month-on-month in December, which was better than expected as consumers hit the highstreet for the Xmas rush. The report provides a good indication that the U.S economy will be able to prevent a hard landing this year as growth in the retail sector and the labour market will be able to supplement the slump in housing.

Data Released 15th January

UK 09:30 DCLG House Prices (November)

UK 09:30 Producer Price Index (December)

EU 10:00 Industrial Production (November)

Written by Adam Solomon