Daily Insight

The Pound has rallied strongly against the majors this week as UK producer price inflation increased at the fastest pace in 16-years in the month of January and provided some optimism that the Bank of England will need to focus on inflation and adopt a neutral stance on monetary policy.

However, the Pound struggled to consolidate on the recent gains made against the Dollar yesterday as the broader CPI report showed that the annual inflation rate was lower actually lower than forecast over the same period.

Consumer prices increased just 2.2% from this stage in 2007, compared with 2.1% in December and it seems that rising producer costs have yet to feed through to the consumer.

The Pound subsequently snapped two days of gains against the Dollar and promptly fell back under the 1.9500 level amid speculation that the Bank of England will continue monetary easing with the next likely cut in April.

Despite consumer prices increasing by less than anticipated, the report also highlighted that the rate of inflation has hit the highest level in seven months amid soaring food and energy costs.

As a result, the Bank of England are unlikely to adopt the same aggressive policy as the U.S and will tentatively reduce borrowing costs as growth in the economy cools. Following the recent conflicting reports on inflation, the Bank of England quarterly report will be of particular interest this morning and considering the MPC cut interest rates in February, the Pound may struggle to make any gains.

The pressure on the European Central Bank to begin monetary easing is growing but the Euro received some much needed support yesterday as the ZEW survey for investor confidence showed an unexpected upswing in sentiment this month.

The unrelenting resilience among German investors saw the index rebound from a 15-year record low in February and propelled the Euro for the best intraday performance of the month.

Given the slightly dovish tone of the ECB press conference last week, pressure is growing on the Central Bank to recognise the imminent threats to economic growth and ignore growing inflationary pressures that threaten to spiral out of control.

However, the German Finance Minister Peer Steinbrueck refuted suggestions that the ECB should adopt a neutral policy and claimed that price stability should be greater concern that the threat of a U.S led economic slowdown.

The renewed appetite for the Dollar continued yesterday as the U.S currency clung to the majority of the recent gains made against the Euro as the rate cuts by the Federal Reserve combined with the fiscal stimulus package announced by the government will prevent the U.S economy from slipping into a recession.

The recent price action surrounding the Dollar has led to speculation that the future outlook for the economy remains positive as the Fed act aggressively and decisively in cut interest rates 125 basis point in just nine days.

However, the outcome of the economy and short-term outlook for the Dollar will largely depend on the tone of U.S retail sales report this afternoon. Consumer spending accounts for almost 70% of U.S gross domestic product and December saw the first contraction in sales since June.

The Dollar may struggle to find any support as January sales figures are also expected to drop and that would incur the first back-to-back decline in sales since December 2001.

Data Released 13th February

UK 09:30 BoE Inflation Report

UK 09:30 Average Earnings (3 months to December)

UK 09:30 Claimant Count Unemployment (January)

EU 10:00 Industrial Production (December)

U.S 13:30 Retail Sales (January)

U.S 15:00 Business Inventories (December)

GER 10:00 ZEW Index (February)

written by Adam Solomon