Daily Insight

The Pound declined heavily against the majors yesterday, dropping through the major support level at 1.4975 versus the Euro following a report on consumer prices, which showed that UK inflation slowed by more than expected in January. Following the Bank of England's decision to keep interest rates unchanged last week, it was widely anticipated that the index would fall back under 3.0% last month. However, prices fell 0.8% from December, which is the single biggest month-on-month decline in four years, and it seems increasingly obvious that the three previous quarter-point rate hikes are having the desired effect in slowing inflation. The annual inflation rate fell back towards 2.7% despite expectations of a more modest drop to 2.9% and the Pound came under increased pressure as the report will only fuel speculation that UK interest rates may of peaked at 5.25%. There is a host of significant economic data released in the UK this morning with the focus falling on the Bank of England quarterly inflation report, which is expected to mirror the consumer price index yesterday in suggesting that UK inflation may of peaked and will gradually fall back towards the 2.0% target this year. Elsewhere, the Pound may find some support as a separate report may show that UK jobless claims fell for a fourth consecutive month in January following the fastest economic growth in over two years.

The recent positive sentiment surrounding the Euro continued yesterday as the single currency made further gains against both Sterling and the Dollar following yet another band of positive economic data. The ZEW Centre for European Economic Research published their monthly survey on German investor confidence, which rose for a third month in February following faster economic growth and evidence that the sales-tax increase wouldn't have a negative effect on consumer spending. Elsewhere, the Euro found further support as the Flash estimate for European gross domestic product showed that economic growth accelerated faster than anticipated in the fourth quarter of last year. In 2006, the European economy grew at the fastest pace in six years following a significant expansion in Germany and recent reports have suggested that the economy will continue to sustain that momentum as the year progresses.

The Dollar relinquished much of the early gains made against the pound yesterday and also declined versus the Euro following a report from the Commerce Department showed that the U.S trade deficit widened for a record fifth year in 2006. The gap between imports and exports rose by 6.5% last year following a severe increase in imported oil, which overwhelmed U.S exports. The shortfall in trade rose to $61.2 Billion in December despite expectations of a more modest rise to $59.7 Billion and it seems that the deficit in goods and services will continue to weigh on economic growth this year. As a result, the Dollar declined against the majors but may be given a reprieve this afternoon as growth in retail sales continues to propel economic growth with the latest survey expected to increase by 0.4% in January.

Data Released 14th February

UK 09:30 Average Earnings (3 months to December)

UK 09:30 Unemployment (January)

UK 10:30 BoE Quarterly Inflation Report

U.S 13:30 Retail Sales (January)

U.S 15:00 Business Inventories (December)

written by Adam Solomon