The fallout from the Northern Rock fiasco continued to weigh on Sterling sentiment yesterday as news of the nationalisation of the lender seriously undermines the credibility of the UK government and the short-term implications on the market may drive the Pound even lower.

Nevertheless, the focus this morning will fall on the release of the minutes from the Bank of England's last policy meeting and the CBI industrial trends survey, which could potentially spark a Pound recovery.

The monetary policy committee lowered interest rates by a further 25 basis points in February but the tone and language used in the Bank's quarterly inflation report suggests that record high food and energy costs are putting upside pressure on price stability.

The governor of the BoE, Mervyn King, raised inflation forecasts this year and warned that the annualised pace of consumer prices may breach the 3.0% barrier over the coming months.

Although King also recognised the downside risks to economic growth, the chief concern among policy makers seems to be the upside risks to inflation and that may prevent the MPC from lowering interest rates too aggressively this year.

However, that sentiment was dashed by MPC member Kate Barker last night as she focused on the prospect of slower growth and proved that the nine-member committee is divided on the future outlook for the UK economy.

The renewed optimism surrounding the Euro saw the single currency make further gains against the Pound yesterday and also recoup some of the losses versus the Dollar in anticipation of the report on German producer prices this morning.

The staunchly hawkish stance of the European Central Bank can be attributed to the upside threat of inflation and the determination to see that risks to price stability do not materialise.

That sentiment may be validated this morning as the focus falls on the German producer price report, which is forecast to increase materially in January and keep the ECB from lowering interest rates in the short-term.

However, the recent price action surrounding the Euro suggests that the market is beginning to factor in a series of rate cuts this year as the tone and language used in the ECB press conference focuses on the downside risks to economic growth.

Following the lacklustre start to the week due to the U.S President's Day holiday, the increased level of volatility returned to the market yesterday as the Dollar paired losses against most major currencies except for the ailing Pound.

Despite the unexpected rise in the NAHB housing market index, a broader indication of the U.S property market is released this afternoon with housing starts expected to remain near the lowest level since 1991.

The worst housing recession in over 25-years is showing few signs of abating and is likely to hamper the economy for a third straight year.

Elsewhere, a separate report from the Labour Department may show that consumer price inflation rose 4.2% in the 12 months through January while core prices are forecast to increase just 0.2% from December.

Data Released 20th February

UK 09:30 PSNCR (January)

UK 09:30 BoE MPC Minutes (February Meeting)

UK 11:00 CBI Industrial Trends - Orders (February)

U.S 13:30 Consumer Price Index (January)

U.S 13:30 Housing Starts (January)

U.S 13:30 Real Earnings (January)

U.S 19:00 FOMC Meeting Minutes

written by Adam Solomon