Daily Insight

The Pound came under pressure against the majors yesterday, falling modestly versus the Dollar and by the close of trading last night had fallen 0.4% against the Euro following a worse-than-expected report on UK factory production. Industrial output slipped 0.1% in December after gaining a revised 0.4% the previous month but the gauge of manufacturing increased for a second month in succession. The significance of the report shows that growth in manufacturing will continue despite the dramatic appreciation of the Pound since August combined with an aggressive tightening of UK interest rates over the same period. The focus today will fall heavily on the Bank of England interest rate announcement at midday and although the consensus forecast suggests a no change in policy this month, we can't dispel the possibility of a further quarter point increase with inflation still well above target. The Monetary Policy Committee was split 5-4 in favour of a rise in rates in January and it is widely anticipated that policy makers will wait to assess the impact of previous rate increases before rising again in March.

The Euro managed to continue making gains yesterday, firming an additional 0.3% against the Dollar and also rose versus the Pound despite a surprisingly negative report on the German industrial sector. Industrial production unexpectedly slipped to a seasonally adjusted 0.5% in December ahead of the sales-tax increase, which threatens to weigh heavily on consumer sentiment. However, the Euro managed to make further gains against both the Euro and the Dollar as we build up to the ECB interest rate announcement this afternoon. Following a particularly dovish rhetoric from the chairman, Jean-Claude Trichet, in last month's press conference we don't expect the Central Bank to raise rates this month. However, the tone and language used in the accompanying statement will be heavily scrutinized for clues on future policy and if Trichet uses his trigger words, "strong vigilance" in order to ensure price stability, it will look very likely that rates will rise in March and that should provide some support to the Euro.

The Dollar managed to claw back modest gains against Sterling yesterday following a report on U.S productivity, which unexpectedly accelerated at the fastest rate in nearly a year in the preliminary estimate for the fourth quarter. However, a separate gauge of the report showed that unit labour costs rose at a much slower pace than anticipated, which provides further speculation that a slowdown in wage growth will continue to tame inflation. The rebound in economic growth combined with seemingly moderating inflationary pressures makes it easier for the chairman of the Federal Reserve, Ben Bernanke, to keep U.S interest rates unchanged over the coming months. However, yesterday a member of the Federal Reserve Bank of Philadelphia, Charles Plosser, indicated that the recent pick-up in economic growth increases the risk that inflation won't moderate and therefore, U.S interest rates will have to increase from the current 5.25%.

Data Released 8th February

UK 12:00 Bank of England Interest Rate Announcement

EU 12:45 European Central Bank Interest Rates Announcement

EU 13:30 ECB Press Conference

GER 11:00 Industrial Orders (December)

U.S 13:30 Initial Jobless Claims (w/e 2nd February)

U.S 15:00 Wholesale Inventories (December)

written by Adam Solomon