Daily Insight

The Pound came under sustained pressure against the majors yesterday, dropping 0.6% versus the Dollar and more significantly a further 0.7% against the Euro as we fall back towards the major support level just above 1.4975. Sterling declined heavily following the Bank of England interest rate announcement where the monetary policy committee elected to hold interest rates at 5.25% following a surprise increase in January. Although the decision to keep rates unchanged was widely anticipated, there were suggestions that policy makers would lift rates back-to-back in February to stem the threat of rising inflation. However, growth in the UK service sector, which accounts for the largest proportion of economic growth, slowed in January while recent reports have also provided evidence of a moderate slowdown in housing. Therefore, the nine-strong committee will wait to see the effects of previous rate increases before another probable move by April. The Pound came under increased pressure as speculation builds that UK interest rates may of peaked at 5.25% and therefore, the CPI figures released next week will take on added significance in order to ascertain if inflation has scaled back through 3.0%. The Pound may be given a reprieve this morning following the release of the UK trade balance, which is expected to show that deficit in goods and services narrowed from £7.2 Billion in December.

The Dollar managed to make modest gains against the Euro yesterday and firmed up a further 0.6% versus the Pound after a report on initial jobless claims gave further indication of healthy growth in the U.S labour market. The number of Americans filing for first time claims rose just 3,000 over the past week to an annual rate of 311,000 with the unemployment rate staying near a six-month low. Elsewhere, a separate report from the Commerce department showed that Wholesale Inventories rose 0.5% in December after a 1.3% increase the previous month.

The Euro rallied strongly against the Pound yesterday as the European Central Bank also kept interest rates steady at 3.5% but gave a strong hint that rates are set to rise by a further quarter-point in March. It was widely anticipated that policy makers would keep rates unchanged this month after a particularly dovish rhetoric from the chairman, Jean-Claude Trichet, in last month's meeting. However, in the accompanying press conference yesterday, Trichet used his trigger words to the market to announce a rate increase next month saying, "strong vigilance remains of the essence to ensure that risks to price stability do not materialise." In each of the last six rate increases since late 2005, the chairman has utilised the exact same terminology to give notice that the Central Bank intend to lift rates the following month and as a result, the Euro made rapid gains against Sterling as we enter a downward trend.

Data Released 9th February

UK 09:30 Global Trade Balance (December)

- Ex EU Trade

written by Adam Solomon