Daily Insight

The Pound came under a modest amount of pressure yesterday, falling 0.3% versus the Dollar and 0.2% against the Euro following the release of the Consumer price index, which showed that UK inflation had risen to a 10-year high in December. However, the figures failed to exceed expectations as the core CPI rose to 3.0%, which is the fastest pace since the series was introduced in 1997 and the figures will only underline the Bank of England's decision to lift interest rates early in January. Prior to the release of the data, there was widespread speculation that inflation would come in above 3.0% in December. A situation that would of forced the governor of the BoE, Mervyn King, to write a letter to the Chancellor explaining why inflation was so far above the 2.0% target. The Pound was also hampered by the RICS house price balance, which showed that UK house prices fell to a four-month low in December, a sign that rising interest rates may help cool the UK housing market. There is some significant data released in the UK this morning and Sterling may receive a boost as the average hourly earnings may rise to 4.2% in the three months to November while elsewhere, a separate report may show unemployment unchanged at 3.0%.

The Euro managed to claw back some early gains against the Dollar yesterday and finished the session modestly higher versus the Pound following the release of the ZEW survey of investor confidence in Germany. The index rose to the highest level in six months in January, which was way ahead of expectations and provides yet further evidence that growth in the German economy will be able to accelerate despite the introduction of the value-added tax increase earlier this month. In terms of economic data, the focus this morning will fall on the harmonised consumer price index, which is widely expected to show that European inflation remained largely unchanged in December. The index will probably come in at 1.9% year-on-year last month, which perhaps underlines why the ECB elected to hold interest rates last week.

The Dollar has managed to stay relatively firm against the majors this week despite the lack of economic data released in light of the Martin Luther King Holiday. However, that trend is set to be broken this afternoon following a report on producer price inflation, which is expected to rise 0.5% in December, reflecting higher petrol prices over the same period. Prices jumped 2.0% the previous month, which was the biggest upward move since 1974 and in December, core prices, excluding the volatile food and energy, probably rose 0.1% on the month. Elsewhere, the Dollar may come under some pressure following a separate report on U.S industrial production, which is expected to increase slightly in December as a slowing economy has a negative impact on demand and output.

Data Released 17th January

UK 09:30 Unemployment (December)
UK 09:30 Average Hourly Earnings (3 months to November)

EU 10:00 Trade Balance (November)
EU 10:00 Harmonised CPI (December)

U.S 13:30 Producer Price Index (December)
U.S 14:00 TICs - Net Capital Inflow (December)
U.S 14:15 Industrial Production (December)
U.S 17:00 NAHB Housing Market Index (January)
U.S 19:00 Fed Beige Book Published

written by Adam Solomon