Daily Insight

Despite making modest gains against the majors on Friday, the Pound resumed the downward momentum this morning and plummeted to a five-month low versus the U.S Dollar after the Prime Minister, Gordon Brown, said the economy faces "tough decisions" in 2008.

In a statement to Sky News, Brown said that he wants to "control inflation and achieve low interest rates for homeowners and low mortgages." The tone and language used in the statement was interpreted as an indication of further monetary easing to come and that will raise speculation of a back-to-back rate cut this week.

The subsequent reaction in the market saw the spread between UK government bonds widen significantly as appetite for risk aversion increased and investors sought safety in short-term securities.

Thus far, the Pound has been one of the worst performing currencies this year and that trend is likely to continue in the near-to-medium term as the Bank of England look to cut rates at least once more before March.

In terms of economic data, the unexpected pick up in service sector growth has done little to overshadow recent evidence to suggest that growth in housing is faltering while consumer confidence has declined in the wake of the Northern Rock fiasco.

The positive sentiment surrounding the Euro and the recent spate of positive economic reports ended in spectacular fashion yesterday as the ECB sentiment index showed that economic confidence had fallen to the lowest level in almost two years.

An index of business and consumer sentiment in the Euro-region fell to a reading of 104.7 in December, which represents the lowest reading since March 2006 as orders weakened and rising food and energy prices pushed up inflation.

In addition, expansion in European service and manufacturing industries have slowed in recent months while consumer confidence is dwindling as oil prices continue to trend higher.

A separate report yesterday showed that a gauge of producer prices accelerated to the highest level in almost a year in November, which means that manufacturers will be forced to pass on higher costs to the consumer and therefore fan inflation.

As a result, the Euro declined against both the Pound and the Dollar while the focus switches to the retail sales report this morning for an indication of how the sector performed amid rising food and energy costs.

The negative sentiment surrounding the U.S economy has seen the Dollar continue to decline against most of the 16 most actively traded currencies but the greenback managed to stem the losses yesterday and actually rise to a five month high versus the Pound.

The overwhelming decline in U.S non farm payrolls led to sharp losses in the Dollar and renewed concerns that the economy was on the brink of recession.

As a result, speculation regarding a January rate cut has intensified and the Fed fund futures market is currently pricing in a 70% chance of a 50 basis point reduction on January 30th.

In terms of economic data, the Dollar may come under renewed pressure against the majors today as further evidence on the U.S housing recession will do little to lift sentiment.

The number of Americans agreeing to buy existing homes is expected to fall for the first time in three months in November, signalling that further deterioration in the sector is likely over the coming months.

Data Released 8th January

UK 00:01 BRC Retail Sales Survey (December)

EU 10:00 Retail Sales (November)

GER 11:00 Industrial Orders (November)

U.S 15:00 Pending Home Sales (November)

written by Adam Solomon