Daily Insight

In early trade yesterday, the Pound continued to decline against the majors, falling to a fresh eight month low versus the Euro and dropping near the yearly lows against the Dollar despite a strong supply of UK economic data. It appears that Sterling continues to suffer and is proving more sensitive to the unwinding of carry trades than the Euro over the past two weeks. Therefore, it looks increasingly likely that the Pound will continue to fall against the single currency over the coming weeks but by the close of trading last night, the Pound had managed to claw back ground against the Japanese Yen and in turn finished the session 0.1% higher versus the Euro. In terms of economic data, UK jobless claims fell to the lowest level in over a year last month after economic growth accelerated to the fastest pace since 2004, which will only add to the case for a further rise in UK interest rates. Policy makers within the Bank of England's monetary policy committee will be watching developments in the labour market very closely as inflation has remained above the 2.0% target for the past nine months. A separate gauge of the report also showed that growth in average earnings accelerated to 4.2% in the first quarter of 2007, which was significantly higher than anticipated and the BoE has previously noted that wage growth will only fuel the flames of inflation. As a result, it looks increasingly likely that policy makers will raise rates for the fourth time since August over the next two months with the market currently anticipating a further quarter-point hike in May.

Initially, the Euro made strong gains against Sterling but finished the session marginally lower against the UK currency following a distinct lack of economic data released in the Euro-zone. However, the Euro has continued to appreciate against the Dollar this morning as a report in Germany showed that inflation had unexpectedly accelerated in February. The core rate of inflation in Europe's largest economy rose to 1.9% from 1.8% in January with consumer prices increasing 0.5% following the introduction of the value-added tax increase at the start of the year. The report will only fuel speculation that the ECB will need to continue raising interest rates this year despite recent reports suggesting that Euro-zone inflation has stayed below the Bank's 2.0% target. However, policy makers within the governing council believe this to be a temporary measure and following a rebound in retail sales and higher energy prices, the Central Bank are likely to lift rates for the eighth time since late 2005. The Euro has remained largely unchanged against the majors in the aftermath of the report this morning but the ECB monthly bulletin may provide an insight into monetary policy. The report is expected to reiterate the recent statement from the chairman, Jean-Claude Trichet, who said that upside risks to price stability remain and the Central bank will monitor developments over the coming month.

The Dollar fell further yesterday, closing last night 0.3% lower against the Pound and the Euro despite a host of positive economic reports, which exceeded initial expectations. The U.S current account deficit narrowed by much more than anticipated in the fourth quarter of 2006 with the shortfall coming in at $195.8 billion from the third as lower oil prices reduced imports. The U.S current account, which represents the broadest measure of trade, is believed to be the single biggest risk to global stability but the report yesterday indicated that the deficit may narrow this year for the first time since 2001. However, the Dollar failed to capitalise on the report, rising modestly against the Euro as a separate report from the Commerce department showed that U.S import prices rose less than forecast in February, which may help keep inflation under control and increase the chances of an interest rate cut in the second half of the year. However, the Dollar may receive a timely boost this afternoon following a barrage of economic data released in the States. The focus will fall on the monthly producer price index, which is expected to show that prices rose in February led by an increase in oil and petrol costs.

Data Released 15th March

EU 09:00 ECB Monthly Bulletin

EU 10:00 Harmonised Consumer Price Index (February)

U.S 12:30 Producer Price Index (February)

U.S 12:30 Initial Jobless Claims (w/e 10th March)

U.S 12:30 Empire State Index (March)

U.S 13:00 TIC's Net Capital Inflow (January)

U.S 16:00 Philly Fed Index (March)

written by Adam Solomon