Daily Insight

The negative sentiment surrounding the Pound continued yesterday as the UK currency plummeted to fresh record lows against the Euro while also consolidating around 1.9550 versus the U.S Dollar despite a surprisingly strong report on factory-gate inflation.

UK factories increased prices at the fastest annual pace since 1991 last month as output prices increased 5% from this stage a year ago and the report illustrates the persistent inflationary concerns that may reduce the Bank of England's scope to cut interest rates in the face of slowing growth.

The Pound failed to find any support after the MPC elected to leave rates unchanged at 5.50% this month with most economists backing a 25 basis point reduction in February.

However, the tone of the report yesterday may diminish speculation of more aggressive monetary easing in the months ahead as the Bank attempts to balance the threat of inflation from higher energy prices against a forecast for a sharp economic slowdown.

Nevertheless, faster producer prices may take some time to feed through to consumer prices with the annual rate of inflation expected to return to the Banks 2.0% target in December.

The consumer price index is expected to show that prices slowed from 2.1% in November, giving the Bank the room to cut interest rates next month.

The Dollar fell to within a cent of the record low versus the Euro and looks poised for further downside movement amid speculation that U.S interest rates will drop below the benchmark lending rate in the Euro-zone for the first time in three years.

The U.S currency has extended three weeks of declines and the U.S currency may struggle to stem the losses as we approach the FOMC rate announcement at the end of January.

Fed Fund Futures are currently pricing in a 40% probability that the Fed will slash rates by as much as 75 basis points this month after comments from the chairman, Ben Bernanke, that the U.S needs to adopt a more aggressive policy on cutting rates.

The unrelenting appreciation of the Euro is showing few signs of slowing as the single currency rallied to a fresh record high against the Pound and also looks poised for an assault on the 1.5000 level versus the Dollar.

However, some sectors of the Euro-zone are already voicing their concerns of a strong currency with France's European Affairs Minister Jouyet complaining that "the country cannot live with the Euro at this level with three other currencies which are weak."

The robust growth in the European economy can be largely attributed to export growth and demand from overseas. However, weaker economic growth in the U.S and the UK will cool demand for European based goods while a strong Euro will alienate the region and see importers source their products elsewhere.

In terms of economic data, the Euro may struggle to make further gains this morning as investor confidence in Germany probably slowed in January and to the lowest level in 15-years on concerns that a U.S recession would weigh heavily on economic growth in the region.

Data Released 15th January

UK 09:30 Consumer Price Index (December)

GER 10:00 ZEW Index (January)

U.S 13:30 Retail Sales (December)

U.S 13:30 Producer Price Index (December)

U.S 13:30 Empire State Index (January)

U.S 15:00 Business Inventories (November)

written by Adam Solomon