Daily Insight

The relentless decline of the Pound has seen the UK currency fall 11% against the Euro since mid August and also plummet to a near 1-year low versus the Dollar as speculation continues to build that the Bank of England will cut interest rates in February.

Nevertheless, the Pound consolidated on the recent gains made against the Euro while also remaining largely unchanged versus the Dollar despite a host of mixed economic report that have done little to change sentiment.

Public finances and UK money supply grew more than expected in December while a separate report showed a sustained drop in mortgage approvals. According to a report from Rightmove plc, UK house prices fell for a third straight month in January as the average costs of home declined 0.8% from the previous month while the annual price gain slowed to 3.4%, which represents the lowest level since 2005.

The decade long housing boom appears to be coming to an end as tighter credit conditions and falling home values requires the Bank of England to act and lower borrowing costs aggressively over the coming months.

The Pound is likely to continue to downward momentum against the majors as the UK currency fell against 10 of the 16 most actively traded currencies yesterday and tested the support around 1.9350 versus the Dollar.

The Dollar rallied against both the Euro and the Pound yesterday as economists speculate on the probability that the Federal Reserve will deliver a 75 basis point cut at the end of January.

Fed fund futures have currently priced in a 50 basis point cut on the 30th of the month but recent comments from the chairman of the Fed, Ben Bernanke has indicated that the FOMC will need to step up monetary easing in the faint hope of preventing a U.S recession.

Despite a host of negative economic data and an impending rate cut, the Dollar has started the week in a positive vain as traders return to work today following the Martin Luther King holiday.

The weakening sentiment surrounding the Euro continued yesterday as the single currency fell considerably against the resurgent U.S Dollar amid a host of negative economic reports and increasingly bearish comments from a number of ECB officials.

The European Central Bank have adopted a staunchly hawkish stance on monetary policy as growth in the economy continued to accelerate despite a U.S economic slowdown and the threat of a global recession.

However, a recent spate of economic reports have shown that growth in manufacturing and service industries unexpectedly contracted in December while business confidence in Germany declined to lowest level in two years.

In addition, one of the reasons for the ECB's reluctance to lower interest rates can be attributed to rising inflationary concerns with consumer prices remaining above 3.0% for the past two months.

Nevertheless, a report yesterday showed that producer prices in Germany dropped 0.1% in December as wholesale prices fell for the first time since October 2006.

Data Released 22nd January

U.K 11:00 CBI Monthly Trends Survey (December)

written by Adam Solomon