Daily Insight

The Dollar managed to rebound sharply against the Euro yesterday, gaining 0.2% against the single currency but by the close of trading last night was modestly lower versus the Pound following the release of the minutes from the Federal Reserve's January policy meeting. The Open Market Committee seemingly remained vigilant on inflation last month with all of the members agreed that a further tightening of interest rates may be necessary if risks to price stability remained. That sentiment was echoed in the recent consumer price index, which showed that inflation had risen by more than anticipated last month. However, the positive sentiment surrounding the Dollar is unlikely to last as the balance of economic reports is expected to lean towards the weak side, which will prompt further speculation that the next likely move for the Fed will be a cut in rates. In terms of economic data, the Dollar shrugged off a separate report, which showed that U.S jobless claims fell by less than expected in the last week, providing further evidence of a slowdown in the labour market. According to the Labour Department, initial claims fell by 27,000 to an annual rate of 332,000 and concerns may ease that relatively low unemployment will increase wage demands and thusly stoke inflation.

The Pound managed to claw back further gains against the Euro yesterday and also closed higher last night versus the Dollar as a report showed that UK business investment grew at its fastest pace in over 10-years in the fourth quarter of 2006. The renewed sentiment for the Pound may continue this morning as the revised estimate for UK GDP may showed that economic growth remained at robust levels in the fourth quarter and confirm an above trend growth of 3.0%. The Pound has managed to rebound against the majors over the past 48hrs following the release of the minutes from the Bank of England's last policy meeting, which only emphasised the need for a further quarter-point rise in rates over the coming months.

The Euro declined for a second day in succession yesterday, falling to a one-week low against the Dollar and falling a further 0.2% versus the Pound despite a selection of positive economic reports. French business confidence rose by more than anticipated in February with the gauge of optimism rising to a reading of 107 this month while an index of Italian confidence also rose beyond expectations. The reports will only provide further evidence that the fastest European economic growth in six years will continue to accelerate and maintain its momentum. However, the Euro failed to consolidate the recent gains made and after testing support around 1.4800 against the Pound earlier this week, the single currency has declined heavily suggesting we made trade higher in the coming weeks. In terms of economic data, the Euro may receive a boost this morning following the release of the German Ifo index, which is expected to show that business sentiment remained at an elevated level this month. The index may drop modestly from January but it is forecast to remain at levels consistent with strong growth.

Data Released 23rd February

GER 09:00 Ifo Index (February)

UK 09:30 Gross Domestic Product (Q4 Revised)

written by Adam Solomon