Daily Insight

The Pound continued the downward momentum against the Dollar yesterday, dropping to a low of 1.9556 by the close of trading last night while also recording losses versus the Euro after an industry report showed that UK consumer confidence had fallen to the lowest level in at least three years.

Despite the unexpected growth in UK service industries over the same period, an index of consumer sentiment fell to the lowest level since 2004 in January as slowing economic growth, rising prices and falling stocks weigh on confidence and Briton's ability to spend.

The report from the Nationwide Building Society has declined by 4 points since December as UK stocks dropped 9% in January while the decade long housing boom appears to be coming to an end.

In the aftermath of the report, the Pound declined against all but three of the 16 most actively traded currencies amid fears that the economic slowdown is deepening while a plunge in global stocks is likely to hamper Sterling as investors move away from high-yielding assets.

The focus today will inevitably fall on the hotly anticipated Bank of England interest rate announcement this lunchtime where the MPC are expected to lower rates by 25 basis points. Nevertheless, the outcome of the two day meeting has been largely factored into the market and the hype surrounding a UK interest rate cut may see the Pound actually make some gains against the majors.

The unrelenting strength of the European economy has been called into question this week as the tone of a number of economic reports points to fresh downside risks to growth with service industries accelerating at the slowest pace in four years.

The Euro continued to decline against the Dollar and also remained largely unchanged versus the Pound as we build up to the ECB interest rate decision and accompanying press conference.

Nevertheless, the Euro has found some support recently as a host of members from the ECB's governing council continue to talk up the resiliance of the economy in the face of U.S led global recession.

The hawkish commentary from the chairman of Central Bank, Jean-Claude Trichet, suggests that the ECB will leave rates unchanged in February but the tone and language used in the press conference will be heavily scrutinized.

If Trichet fails to acknowledge the weakening sentiment in the Euro-zone economy, we can expect the Euro to make widespread gains against the majors as policy makers retain a hawkish stance on inflation.

The surprising resilience of the Dollar has been the main theme over the past week and that trend continued yesterday as the U.S currency made further gains versus the Pound as a report on worker productivity grew by more than forecast in the fourth quarter.

Productivity, which measures employee efficiency, rose to annualised rate of 1.9% after a 6% increase in the third quarter while a measure of labour costs rose by less than forecast.

The dire outlook for the U.S economy has been emphasised by the tone of recent economic data but the upside movement of the Dollar can be attributed to the market's interpretation of the Fed's actions last month and the assumption that policy makers have acted clinically to avoid a U.S recession.

Therefore, the data released in the U.S is likely to have little impact on the market with pending home sales expected to fall a further 1% in December and compound the housing market to the worst performance since 1990.

Data Released 7th February

U.K 09:30 Industrial Production

- Manufacturing Output

UK 12:30 BoE Rate Announcement

GER 11:00 Industrial Orders (December)

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 2nd February)

U.S 15:00 Pending Home Sales (December)

U.S 20:00 Consumer Credit (December)

written by Adam Solomon