Daily Insight

Following on from last week, the Pound declined heavily versus the Dollar on Thursday and that trend continued into Friday as the UK currency paired losses with most of the 16 most actively traded currencies following the Bank of England's decision to lower interest rates for the second time in three months.

The nine-member monetary policy committee elected to lower the benchmark lending rate to 5.25% in response to slowing consumer spending and falling house prices. As a result, the Pound promptly plunged over 1% against the Dollar in the aftermath of the announcement despite the Federal Reserve lowering rates by the fastest pace since 1990 just a week earlier.

In terms of economic data, the Pound failed to find any support as the National Institute of Economic and Social Research said that UK economic growth expanded at the weakest pace since 2005 in the three months through January.

The economy grew at just 0.5%, compared with 0.6% in the fourth quarter and the report suggests that an economic slowdown in deepening, following the worst slump in house prices for over a decade.

The Pound is likely to struggle against the majors this week as a barrage of weakening economic data gives the Bank of England scope to continue monetary easing, with the next likely cut in April.

The renewed sentiment surrounding the Dollar continued on Friday as the U.S currency remained resilient in the face of a barrage of weak economic data to climb against the Pound and consolidate on the 2.2% gain on the Euro.

On the whole, U.S economic data has pointed to a further softening in the housing market while consumer spending slows and service sector growth contracts.

Nevertheless, the aggressive actions of the FOMC last month have been interpreted as positive for the future outlook of the U.S economy while the short-term Dollar strength may continue as the President of the San Francisco Bank, Janet Yellen, said that the economy will avoid a recession.

The weakening sentiment surrounding the European economy lead to the Euro recording the biggest weekly decline against the Dollar in nearly two years while also posting losses versus the Pound as the ECB president, Jean-Claude Trichet, signalled that the Central Bank is not adverse to cutting interest rates.

Recent hawkish commentary from a number of ECB officials has been in stark contrast to the tone of recent economic reports, which has heightened concerns that the Euro-zone economy is susceptible to a U.S recession.

In the aftermath of the ECB press conference, the Euro fell against 14 of the 16 most actively traded currencies and there is potential for further downside movement this week with the focus falling on the initial estimates for Euro-zone economic growth in the fourth quarter.

The Central Bank have been far more concerned with rising inflationary pressures than the potential for an economic slowdown but the report this week may invoke speculation of an impending rate cut in the months ahead.

Data Released 11th February

UK 09:30 DCLG House Prices (December)

UK 09:30 Producer Price Index (January)

UK 09:30 Trade Balance (December)

written by Adam Solomon