Daily Insight

The Pound advanced yesterday to consolidate its recent gains against the majors by firming an additional 0.2% versus the Euro to trade at the highest level in two and a half years. Sterling found support as a gauge of inflation showed that producer output prices rose 0.2% in December, the highest since August last year, which further underlines the Bank of England's decision to lift UK interest rates this month. However, the focus this morning will fall heavily on a separate government report, which is widely expected to show UK inflation at the highest level in a decade. The consumer price index, which rose to 2.7% year-on-year in November, is expected to rise to 3.0% in December, the highest since August 1992. If the index on consumer price inflation comes in above the consensus then we can expect the Pound to make further gains against the majors after firming a further 0.3% versus the Dollar by the close of trading last night. However, if the gauge of inflation falls short of the anticipated 3.0% mark, Sterling may come under increased pressure as speculation will build that the BoE weren't entirely justified in raising rates early.

The Dollar remained largely unchanged against the majors yesterday, falling modestly versus the Pound and the Euro as the States observed the Martin Luther King holiday. There is a distinct lack of fundamental data released in the first half of the week but the Dollar may come under some pressure this afternoon as the Empire State manufacturing index is expected to fall to a reading of 20.1 from 23.13 in December.

The Euro rebounded against the Dollar yesterday after falling to a six week low on Friday following a considerably positive report on U.S retail sales. The positive sentiment surrounding the Euro may continue today as a report from the ZEW centre of economic research is expected to show that German investor confidence rose in January. The ZEW survey may rise to a reading of minus 10 this month, the highest level in five months, on forecasts that German economic growth will accelerate in the face of the value added tax increase, which was introduced at the start of the month.

Data Released 16th January

UK 09:30 Consumer Price Index (December)

GER 10:00 ZEW Expectations Balance (January)

U.S 13:30 Empire State Index (January)

written by Adam Solomon