Daily Insight

The Pound declined against 12 of the 16 most actively traded currencies in early trade yesterday after a report from the Royal Institution of Chartered Surveyors showed that January was the worst for the British housing market since the months that followed the last recession in 1992.

Recent evidence has portrayed an un-denying slump in real estate and the report yesterday will provide further speculation that the decade long housing boom is coming to an abrupt end.

The gains in house prices fell significantly short of expectations and actually fell by the most since 1992 despite the Bank of England's decision to lower interest rates on two occasions in just three months.

In addition, the dwindling sentiment surrounding the UK economy is combined with tighter lending conditions that restricts first time buyers and threatens to shatter consumer confidence.

Nevertheless, the Pound actually finished the day higher against the Dollar as a separate quarterly report from the Bank of England raised UK inflation expectations to the highest level in five months after consumer prices accelerated to the fastest pace since July 2007.

Rising inflationary concerns will have an immediate impact on monetary policy and that may prevent the Bank of England from cutting interest rates too aggressively this year. The Pound also rallied higher yesterday following news from the Office of National Statistics who reported that UK unemployment fell for the 16th consecutive month and to the lowest level since 1975.

Robust growth in the labour market is likely to support UK economic growth this year as the impact from the U.S subprime mortgage crisis spreads across Europe.

The Euro has performed solidly against the Dollar over the past few trading sessions but a spate of weak economic data and strong U.S retail sales numbers saw the single currency consolidate under the 1.4600 level.

Industrial output in the Euro-zone was forecast to accelerate in the month of December but a smaller rebound in German and French production gave a strong indication that manufacturing through the whole of Europe could falter.

In addition, the Euro has found little support this morning as preliminary estimates for GDP in Europe's two largest economies showed that growth cooled in the three months through December.

Reports in Germany showed that gross domestic product rose just 0.3% from the third quarter and there are real signs that the Euro-zone economy is losing momentum.

The positive sentiment surrounding the Dollar continued yesterday as the U.S currency clung on to the recent gains made against the majors as an unexpected rise in consumer spending quashed concerns that the U.S economy stands on the precipice of a recession.

The hotly anticipated report from the Commerce Department showed that U.S retail sales actually rose 0.3% in January and the Dollar may continue to make gains amid speculation that the Fed have acted pro-actively in protecting the future outlook for the economy.

Consumer spending accounts for almost 70% of gross domestic product and will probably decline over the coming months, prompting the Federal Reserve to continue monetary easing.

Nevertheless, the unexpected rise in retail sales for January will diminish recession anxieties for the time being while the report also coincides with comments from a number of Fed officials.

Data Released 14th February

EU 08:00 ECB Monthly Bulletin Published (December)

EU 10:00 GDP Flash (Q4)

U.S 13:30 Jobless Claims (w/e 8th February)

U.S 15:00 Trade Balance (December)

written by Adam Solomon