Daily Insight

Sterling advanced against the majors, firming an additional 0.5% versus the U.S Dollar and by the close of trading last night increased 0.2% against the Euro following the report from the British Retail Consortium, which showed that strong consumer spending continued after the Xmas period. The annual growth rate in like-for-like sales increased beyond expectations with values rising 3.1% in January and the report provides further evidence that consumers will be able to supplement higher interest rates and carry on spending. Therefore, it seems increasingly likely that the MPC will continue monetary tightening over the coming months and although we anticipate a 'no change' in policy this Thursday, there is always the outside chance the BoE will hike rates early with inflation expected to rise further over the past month. The Pound may continue to make gains against both the Euro and the Dollar this morning as a report on the UK industrial sector is expected to show a further rise in production and manufacturing output in December.

The Euro managed to remain firm against the Dollar yesterday, rising a modest 0.3% on the session despite a worse-than-expected report on European retail sales and a drop in German factory orders. Previous reports have shown that consumer spending remained relatively robust over the Xmas period as shoppers stepped up spending ahead of the introduction of the German VAT increase at the start of 2007. As a result, the Euro declined against the Pound but may receive a timely boost this morning as German industrial production is expected to rise 0.5% in December despite the surprising drop in orders over the same period.

The Dollar came under further pressure against both the Euro and the Pound yesterday following a distinct lack of economic data released in the States this week. However, the U.S currency may receive a much needed boost this afternoon as nonfarm productivity probably accelerated in the preliminary estimate for the fourth quarter with expectations of a 1.1% rise from the previous quarter. However, a separate gauge on the report may show that labour costs accelerated at a slower pace, which suggests that wage growth may have moderated and therefore reduced the threat of inflation. As a result, recent comments from the Federal Reserve over a rebound in economic growth combined with lower inflation will look increasingly likely, which will make it easier for policy makers to keep interest rates on hold.

Data Released 7th February

UK 09:30 Industrial Production (December)

- Manufacturing Output

GER 11:00 Industrial Production (December)

U.S 13:30 Productivity (Q4 Prelim)

- Unit Labour Costs

written by Adam Solomon