Daily Insight

Following on from last week, the Pound recorded its first weekly advance against the Dollar since mid January as a hawkish quarterly inflation report and surprisingly positive economic data may prevent the Bank of England from cutting UK interest rates too aggressively over the coming months.

Following reports that consumer prices had risen to the highest level in seven months in January, the Central Bank released a statement saying that the annualised pace of inflation could breach the 3.0% barrier this year.

Recent reports have indicated that the UK economy is slowing but the obvious threat of inflation will be of particular concern to policy makers as they attempt to balance the risks to growth against record high food and energy costs.

The Pound rallied higher for five straight days against the Dollar but that move was cut short on Friday as a fundamental lack of UK economic data meant the upward move was driven almost entirely by Dollar weakness.

The Pound was also hampered by fears that UK banks will have to announce further write-downs this year after news broke that UBS will report losses upto $18 billion on its collateralized debt obligations. In addition, the UK currency has fallen significantly this morning as news broke of the nationalisation of Northern Rock plc.

The focus this week will fall on the release of the minutes from the Bank of England's last policy meeting and considering the tone of the Bank's quarterly inflation report, the decision to cut interest rates is expected to be a close call.

The Pound may find some support if the monetary policy committee was split in the decision to lower interest rates and that will provoke further speculation that the MPC will adopt a cautious approach on monetary policy for the remainder of the year.

The conflicting statements from a number of ECB officials drove the Euro higher against the Dollar last week with the single currency also making gains versus the Pound as the staunchly hawkish stance from some governing council members means an interest rate cut is far from certain.

The tone and language used in the ECB's monthly bulletin seems to suggest that policy makers are divided on the potential impact to Euro-zone economic growth but most agree that the economy will resist a U.S led economic slowdown.

The statement followed an earlier report that showed the flash estimate of Euro-zone economic growth actually slowed by less than anticipated in the three months December.

However, growth in the economy is slowing and the ECB will have to recognise the downside risks to growth while balancing the persistently high inflationary pressures. That sentiment was almost echoed in the European trade balance for the month of December where exports fell by the most in more than two years.

Global growth is slowing and therefore overseas demand is waning while the Euro's dramatic appreciation against the majors is likely to see orders decline further over the coming months.

A host of worsening economic reports and the deteriorating outlook of the U.S economy has seen the Dollar trade sharply lower against the majors and that trend looks set to continue as Bernanke's testimony to Congress reinforced expectations of further substantial U.S interest rate cuts to come.

In terms of economic data, the Dollar found little support as the Empire State index showed manufacturing in the New York region unexpectedly contracted for the first time in almost three years.

Concerns over a global economic slowdown has sapped demand from overseas while new orders and shipments declined by the most since May 2005. The worst slump in real estate for nearly 25-years combined with a softening labour market means that manufacturing output is likely to weaken further over the coming months and help push the broader economy into the realms of a recession.

Elsewhere, a separate regional survey on consumer confidence showed that sentiment had slumped to the lowest level since 1992 as the University of Michigan index fell to a reading of 69.6 from 78.4 in January.

Data Released 18th February

U.S President's Day Holiday

(No economic data released)

written by Adam Solomon