Daily Insight

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There was a lot of volatility in the market yesterday as the Dollar initially advanced against Sterling to trade briefly under 1.9500 following the release of the advanced estimate for economic growth in the fourth quarter of last year. The report showed that the U.S economy grew at a faster pace than anticipated, rising to an annual rate of 3.5% in the final quarter following a significant rebound in consumer spending as fuel prices continued to tumble. In the aftermath of the report, the Dollar rose against Sterling and made modest gains versus the Euro but a separate index on U.S business activity in the mid-west unexpectedly declined. The Purchasing Manager's report on manufacturing in the Chicago region contracted for the first time since April 2003 following a sustained drop in new orders as the index plummeted to a reading of 48.8 with a figure above 50 indicating expansion. Elsewhere, the Dollar extended its losses as the Federal Reserve kept U.S interest rates at 5.25% although policy makers retained their bias towards further tightening if inflation continues to rise. The Open Market Committee voted unanimously to hold rates for the seventh consecutive month but with recent economic reports showing expansion in the labour market, strong consumer spending and a rebound in the housing sector, it seems increasingly likely that the Fed will refrain from cutting rates at least until the second half of the year.

There is a plethora of significant economic reports released in the States this afternoon with the focus falling on the personal income and expenditure report, which is expected to show further growth in wages for December and add to the current inflationary pressures. Elsewhere, the Dollar may find further support as the Institute of Supply and Management release their monthly report on U.S manufacturing, which is expected to increase to a reading of 52.0 in January from 51.4 the previous month. Following the lacklustre performance of business activity in the Chicago region, the report will take on added significance and a drop below 50 will evidently weigh on Dollar sentiment.

The Euro managed to rise significantly against the majors yesterday, firming an additional 0.4% versus the Pound and trading up through 1.3000 against the Dollar by the close of trading last night. The single currency found support as German retail sales rose above forecasts in December although the report is not representative of the current climate following the VAT increase at the start of January. Elsewhere, German unemployment fell to the lowest level in more than five years in January as strong economic growth encouraged companies to step up hiring. However, the Euro managed to consolidate the recent gains against the majors despite a separate report on European consumer prices, which showed that inflation remained below target for a fifth consecutive month. It was widely anticipated that the Flash estimate consumer price index would rise to 2.1% in January but the official figures showed that the inflation rate stayed unchanged at 1.9% as confidence offset the effect of the German tax increase.

Data Released 1st February

UK 09:30 CIPS Manufacturing Survey (January)

EU 09:00 Manufacturing PMI (January)

U.S 13:30 Weekly Jobless Claims (w/e 27th January)

U.S 13:30 Personal Income / Expenditure (December)
- Core PCE Deflator

U.S 15:00 Manufacturing ISM (January)

U.S 15:00 Pending Home Sales (December)

written by Adam Solomon