Daily Insight

Following on from last week, the Pound declined heavily against majors following the decision from the Bank of England to leave UK interest rates on hold at 5.25% as policy makers wait to assess the impact of three previous rate hikes since August. Although the outcome was widely anticipated, the Pound came under increased pressure as speculation mounts that UK interest rates may of peaked following the partial slowdown in housing and the services industry. The Pound fell back towards the major resistance level at 1.4975 against the Euro and also made substantial losses versus the Dollar as a separate report on Friday showed that the UK trade deficit unexpectedly widened in December. The deficit in goods and services rose to £7.1 Billion, which is the highest increase in seven months as a stronger pound weighed on UK exports. The focus this week in terms of economic data will fall heavily on the release of the January consumer price index, which is expected to show moderating inflationary pressures following the Bank's decision to leave rates on hold this month. Sterling may receive a timely boost this morning as a gauge of UK house prices are expected to show a moderate increase in December while elsewhere, the producer price index may show that output prices increased 0.2% in January.

There is a plethora of U.S economic data released in the States this week and the focus will fall on the chairman of the Federal Reserve, Ben Bernanke, as he delivers the semi-annual testimony to the Senate, which is expected to outline that inflation is moderating while the housing market is showing signs of stabilising. Elsewhere, the Dollar may make further gains against the Pound as U.S retail data is expected to show a further pick-up in sales for January while growth in the U.S industrial sector is may show a modest pick-up in output over the same period. However, the U.S trade balance, released tomorrow, is widely anticipated to show that the deficit in goods and services widened to $59.5 Billion in December with export prices rising 0.3%.

The Euro has made significant gains against both the Dollar and the Pound over the past week as the chairman of the European Central Bank gave a very strong indication that interest rates would rise a further quarter-point next month. Although policy makers left rates on hold this month, the accompanying press conference saw the chairman, Jean-Claude Trichet, announce that "strong vigilance" would be necessary to ensure price stability, which is the exact same terminology used in each month prior to a rate increase. As a result, the Euro rallied furiously and the single currency may remain relatively strong this week as the Flash estimate for European gross domestic product is expected to show robust growth in the revised figures for the fourth quarter, supporting the Central Bank's tightening campaign.

Data Released 12th February

UK 09:30 Producer Price Index (January)

UK 09:30 DCLG House Prices (December)

U.S 19:00 Treasury Budget (January)

written by Adam Solomon