Daily Insight

Following on from last week, the Dollar made modest gains against both the Euro and the Pound on Friday after the monthly U.S job report showed that the economy added 97,000 jobs to payrolls last month, which was slightly ahead of expectations, while the unemployment rate surprisingly shrank to 4.5%. Initially, the Dollar managed to claw back the recent gains made against Sterling as a separate report from the Commerce department showed that the U.S trade deficit unexpectedly narrowed in January as export growth rose to a record 1.1% from December. There is a host of significant economic data released in the States this week with the focus falling on the monthly consumer price index, which is expected to show that inflation remains at an elevated level in February. Prices are expected to stay fairly unchanged from the previous month with the core rate of inflation coming in above the Federal Reserve's target at 2.7%. Elsewhere, the Dollar may receive a much needed boost following the release of the U.S current account balance on Wednesday, which is expected to show that the deficit narrowed in the fourth quarter. The full-year deficit, measured as a percentage of gross domestic product, represents the biggest threat to stability in the world economy and may shrink to $203 billion from $225 billion in the previous quarter.

The Euro failed to consolidate on the recent gains made against Sterling as we traded well above 1.4700 by the close of trading on Friday as the European Central Bank
raised interest rates for the seventh time in this tightening cycle but failed to announce a further rise in rates next month. The shift in tone and language used in the accompanying press conference seemed to suggest that the ECB will continue to monitor the risks to price stability and will probably lift interest rates to 4.00% over the coming months. However, the chairman of the Central Bank, Jean-Claude Trichet, failed to use the same terminology, "strong vigilance" in his statement, which gives the market notice that interest rates are set to rise the following month. That sentiment was echoed by a member of the ECB's governing council, Klaus Liebscher, who stated that the Central Bank would need to continue monetary tightening because inflation remains a threat. However, with oil prices declining heavily since the fourth quarter of 2006, Euro-zone inflation has remained below the Bank's 2.0% target for the first year since 1999.

The Pound has managed to make significant gains against both the Euro and the Dollar since Friday despite the Bank of England's decision to leave interest rates on hold at 5.25%. We will have to wait until next week for the release of the minutes from the policy setting meeting in order to gauge how the committee voted this month but a further quarter-point increase is still on the agenda with the market anticipating a rise in rates by June. The Pound also managed to remain firm despite a surprisingly negative report on UK factory production, which unexpectedly fell for the first in three months in January following the Pound's dramatic appreciation against other major currencies. However, UK manufacturers have shown an increase in confidence in recent months and that may feed through to higher producer prices in the data for February. The index, released this morning, is expected to show that output prices increased 0.2% in February while the annual rate may stay unchanged at 2.1%. Elsewhere, the unemployment data on Wednesday will be watched closely for any insights into monetary policy as the jobless rate is expected to fall further while average earnings will also feed through to increased inflationary pressures.

Data Released 12th March

UK 09:30 Producer Price Index (February)

written by Adam Solomon