Daily Insight

The Pound continued to climb higher yesterday, jumping to a fresh two and a half year high against the Euro and increased a further 0.4% versus the Dollar following a particularly positive report on the UK labour market. Unemployment claims fell by more than expected in December, falling towards a nine-month low following a significant expansion in UK service industries. The number of Britons out of work and claiming benefits fell 5,500 on the month to an annual 943,100, the lowest level since March last year while the unemployment rate stayed unchanged at 3.0%. A swelling workforce will undoubtedly lead to higher wage demands and that has prompted further speculation that the Bank of England will need to raise interest rates again in February or March. A separate report yesterday showed that the average hourly earnings rose 4.1% in the three months to November, which was largely unchanged from the previous quarter and was slightly below the forecasted rise to 4.2%.

The Euro remained largely unchanged against the Dollar yesterday but fell a further 0.3% versus the Pound despite a round a positive economic reports, which showed that Europe's trade surplus widened in November. As lower oil prices and a strong Euro reduced the cost of energy, the surplus grew to €4.5 Billion from a revised €2.4 Billion the previous month with exports rising 1.7%. Elsewhere, the Euro continued to decline as a separate report on consumer prices showed that Euro-zone inflation came in unchanged at 1.9% in December. The preliminary estimate held below the ECB's 2.0% target for the fourth month in succession while the core rate came in slightly under expectations at 1.5%. Therefore, the inflation numbers yesterday provide an insight into the reasons behind the shift in tone from the ECB and perhaps explains why Euro-zone interest rates may stay unchanged at 3.5% next month.

The Dollar held firm against the Euro yesterday but by the close of trading last night had slipped back towards 1.9700 versus the Pound following a string of economic data released in the States. Firstly, a report on producer prices showed that a gauge of inflation had risen by more than expected in December, reflecting higher petrol prices over the same period. However, the price of crude oil has dipped 20% since mid-November and therefore, the report yesterday will only fuel speculation that interest rates will remain on hold as prices continue to ease. Elsewhere, the Dollar also failed to capitalise following a positive report on industrial production, which rose by more than expected in December and may provide an indication of a rebound in U.S manufacturing following greater demand at home and overseas. The focus today in terms of economic data will fall on the release of the consumer price index for December, which is expected to show that prices rose 0.4%, the highest month-on-month increase since July. The report is also expected to show inflation running at 2.6% at the end of 2006, which is the biggest gain in five years and will keep the Federal Reserve on alert to monitor the continued threats to price stability.

Data Released 18th January

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Consumer Price Index (December)
U.S 13:30 Housing Starts (December)
U.S 13:30 Initial Jobless Claims (w/e 13th January)
U.S 15:00 Leading Indicators (December)
U.S 17:00 Philly Fed Index (January)

written by Adam Solomon