Daily Insight

Following the Bank of England's quarterly inflation report earlier this week, the Pound had managed to make some modest gains against the majors as the governor of the Central Bank, Mervyn King, indicated that a further quarter-point rate increase maybe necessary this year. However, any positive momentum was crushed in early trading yesterday as Sterling fell 0.6% against the Euro to close well under 1.4900 last night while also declining 0.5% versus the U.S Dollar. The sell-off was sparked by a particularly negative report on the UK retail sector, which showed that sales unexpectedly dropped by the most in four years in January. Sales declined 1.8% despite initial expectations of 0.4% increase and the report suggests that higher energy bills and rising interest rates are beginning to weigh heavily on consumer sentiment.
As a direct result of the report, Sterling dropped to lowest level against the Euro in five weeks and also traded down against the dollar as a separate industry survey showed that UK house prices accelerated at the slowest pace in seven months. However, with economic growth accelerating to the fastest pace in well over two years, workers are likely to demand high wages and a report from the IRS this morning shows that settlements reached the highest level in eight years in January, which will only add to the current inflationary pressures.

The Euro managed to make further gains yesterday, rising to a fresh six-week high against the Dollar despite the apparent lack of any significant economic reports in the Euro-zone. The ECB published their monthly bulletin, which only reiterated the hawkish sentiment with regards a further rise in European interest rates next month and therefore, didn't have too much bearing on market movement. The Euro has received a further boost this morning as final estimate for German consumer prices showed that inflation accelerated in January following the introduction of the sales-tax increase at the start of the year. Prices rose 1.8% year-on-year last month and with lower energy costs and declining unemployment providing support to consumer spending, we can expect Euro-zone interest rates to continue to rise beyond March.

There was a host of significant economic reports released in the States yesterday with the focus falling on U.S industrial production, which showed that output fell by the most in almost a year in January. U.S factory production dropped 0.5% against expectations of 0.2% gain and the report will only support the Fed's view that the economy will continue to expand at a slower pace while inflation will also moderate further over the coming months. A separate report from the Federal Reserve showed that manufacturing in the Philadelphia region also slowed in February with orders dropping to a reading of 0.6 in February. The evident decline in U.S manufacturing is seemingly beginning to weigh on the labour market as the number of people out of work and claiming benefits rose by 44,000 last week, which represent the biggest weekly increase since September 2005. As a result, the Dollar came under increased pressure and that trend may continue this afternoon as the January producer price index may show a moderate drop in the inflation gauge with prices falling back to an annual rate of 1.7%.

Data Released 16th February

EU 10:00 Trade Balance (December)

U.S 13:30 Producer Price Index (January)

U.S 13:30 Housing Starts / Building Permits (January)

U.S 15:00 Michigan Sentiment (Prelim February)

written by Adam Solomon