Daily Insight

Following on from last week, the Dollar continued to decline against the majors, dropping to a fresh six-week low versus the Euro following a string of poor economic reports that have provided yet further evidence that the Federal Reserve will keep interest rates steady over the coming months. Activity in the U.S industrial sector slowed by the most in almost a year in January and on Friday a separate government report showed that producer prices declined by more than expected, falling 0.6% from the previous month. The report provides a further indication that the U.S economy will continue to expand at a moderate pace while inflation remains contained as lower energy prices limit the possibility of companies raising prices. Elsewhere, the negative sentiment surrounding the Dollar was fuelled as a report on the housing sector showed that builders started work on the fewest number of homes since August 1997, sparking fresh concerns that the dramatic slump in housing has yet to peak. There is a sparse supply of economic data released in the States this week with the focus falling on the U.S consumer price index. The headline measure is expected to moderate to 2.1% in January from 2.5% the previous month and the index will only provide further evidence that inflation has continued to drop over the past month.

The Euro has continued to make rapid gains against both the Pound and the Dollar over the past week as speculation that interest rates will rise beyond 3.5% continues to drive the single currency. There is a distinct lack of economic reports released in the Euro-zone this week with the focus falling on the German Ifo index this Friday, which is expected to show that business confidence declined for a second month in February. The Ifo sentiment index may decline to a reading of 107.5 this month from 107.9 in January as the impact of the sales-tax increase combined with higher interest rates threatens to weigh on consumer optimism. However, economic growth in Europe's largest economy is widely expected to accelerate in the final estimate for the fourth quarter on Friday after the fastest expansion in six years in 2006.

The Pound declined heavily against the Euro last week after consumer price inflation fell by the most in four years month-on-month in January while U.K retail sales also declined by the most since 2003. However, the Bank of England quarterly inflation report showed that policy makers may raise interest rates once more this year in order to bring inflation back towards the 2.0% target and therefore the focus this week will fall heavily on the minutes from the last policy meeting. The monetary policy committee was split 5-4 in favour of raising interest rates in January and it will be interesting to gauge how the 9-strong team voted this month. The tone and language of the minutes will also be heavily scrutinized as investors look for any insights into future policy following the unexpected decline in consumer prices over the past month. The Pound has received a timely boost this morning as a gauge of UK property price inflation accelerated by more than anticipated in February. Despite interest rates rising three times since last August, the issue of supply and demand continues to dominate with prices rising 0.9% in January according to the Rightmove house price survey.

Data Released 19th February

UK 00:30 Rightmove House Prices

U.S President's Day Holiday

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written by Adam Solomon