Daily Insight

Following on from the last week, the Pound managed to rebound sharply against the majors by the close of trading on Friday after falling to a fresh six-week low versus the Euro earlier in the week. The positive sentiment surrounding the Pound stemmed from the release of the minutes from the Bank of England's last policy meeting, which showed that the committee voted 7-2 in favour of a no change in rates this month with the two dissenters recommending a further quarter-point rise. Combined with the quarterly inflation report, it seems increasing likely that the MPC will lift UK interest rates at some stage over the coming months but may take some additional time to assess the impact of three previous rate hikes since last August. There is a host of significant economic reports released in the UK this week with the PMI manufacturing report, consumer confidence and the CBI distributive trades survey all expected to provide some insight in the chance of rate hike in March. The Pound has received a further boost this morning as UK house-price inflation accelerated at the fastest pace in over three years in February as the underlying issue of supply and demand keeps prices rising. According to the Hometrack survey, house prices rose 6.4% year-on-year last month, which represents the biggest yearly increase since 2003 while prices rose 0.7% on the month.

The Euro came under further pressure against the Pound towards the end of the week following a worse than expected report on German business confidence, which fell by more than initial forecasts, providing an indication that economic growth is slowing from the fastest pace in six years. The Ifo sentiment index declined to a reading of 107 from 107.9 in January following the value-added tax increase at the start of 2007, which threatens to weigh on consumer spending as retail sales slump and manufacturing loses momentum. There is a host of economic data released in the Euro-zone this week with the focus falling on the EC sentiment surveys, manufacturing PMI and the M3 money supply, which provides an indication of inflation. Money supply growth into the Euro-region is expected to reflect strong growth, which may pose an increased risk to price stability and may prompt the ECB to quicken the pace of monetary tightening. The Euro has managed to remain virtually unchanged against the majors this morning despite damaging report on German consumer confidence, which unexpectedly fell to the lowest level in 14-months.

The Dollar came under increased pressure last week, falling heavily against both the Euro and the Pound following a distinct lack of economic data released in the States. However, there is a plethora of significant reports released this week, which are set to challenge the Fed's view of the economy showing strong growth combined with moderating inflationary pressures and the stabilisation of the U.S housing market. A gauge of consumer confidence, released tomorrow, is widely expected to decline heavily in January following higher petrol prices and a significant rise in jobless claims over the same period. While elsewhere, the focus will fall heavily on the core personal consumption expenditure deflator, which is the Federal Reserve's preferred measure of inflation and is expected to rise above 2.2% last month. Persistently high core inflation will keep the Fed on red alert with regards monetary policy and may revive speculation of a further rise in U.S interest rates. Elsewhere, existing and new home sales along with the January construction spending report will be watched closely for any insights into the pace of activity in the housing sector, which has suffered the worst slump in 17-years.

Data Released 26th February

GER 07:00 Gfk Consumer Confidence (March)

written by Adam Solomon