Daily Insight

Following on from last week, the Pound plummeted to a fresh record low against the Euro and also declined to the lowest level in almost a year versus the Dollar as the Bank of England decided to leave UK interest rates on hold at 5.50%.

In the build-up to the announcement there was widespread speculation that the MPC would reduce the benchmark lending rate by another 25 basis points given the negative outlook for the UK economy and the seemingly endless line of weakening economic reports.

Therefore, it was a touch surprising that the Pound didn't rally against the majors and actually made further losses versus the Euro as we tentatively approach the 1.3000 level.

The downward momentum surrounding the Pound continued on Friday as growth in the UK manufacturing sector unexpectedly contracted in November and fell to the lowest level in five years following a drop in consumer spending.

The report underlines the reliance on consumer spending and retail growth as the primary source of economic expansion. Factory output declined by 0.1% in November following a modest increase the previous month as manufacturers face the threat of slowing export demand as the U.S economy stands on the brink of recession.

The focus this week will fall on the latest round of inflation data and all eyes will be fixed on the consumer price index on Tuesday as the market starts pricing in a 25 basis point cut in February.

The Euro has been struggling to consolidate above 1.4700 versus the Dollar but the single currency managed to make substantial gains against the majors on Friday as the ECB maintained their hawkish bias towards raising interest rates in the face of rising inflationary pressures.

A spate of weak economic reports and an overall drop in risk appetite has seen the Euro fail to stay above 1.4800 for the third time this month although the current price action does not necessarily reflect the dramatic shift in interest rate expectations.

Wholesale prices in Germany and industrial production in the Euro-zone were both softer than initial expectations but although the economic outlook continues to sour, the Euro will probably hit 1.5000 against the Dollar amid contrasting interest rate expectations.

The tone and language used by the chairman of the Central Bank, Jean-Claude Trichet continues to sway towards further monetary tightening as the annualised pace of inflation remained above 3.0% for the second consecutive month.

Data Released 14th January

UK 09:30 Producer Price Index (December)

EU 10:00 Industrial Production (November)

written by Adam Solomon