Daily Insight

The speculation surrounding the Bank of England interest rate announcement has seen the Pound decline against most of the major currencies in the last week and that trend continued yesterday as the UK currency sank below 1.9700 versus the Dollar following a report on UK house prices.

According to a report from HBOS Plc, the average cost of a home in Britain remained unchanged at £197,244 in January as rising credit costs and fewer mortgage applications dampened sentiment.

Prices actually fell 1% in the last quarter and rose just 4.5% from this stage in 2007 as UK lenders impose stricter lending conditions as they attempt to contain the losses stemming from the collapse of the U.S subprime mortgage market.

Nevertheless, the Pound actually made robust gains against the Euro yesterday as a separate report from the Chartered Institute of Purchasing and Supply showed that growth in UK service industries unexpectedly accelerated for a second month in a row.

The index actually rose to a reading of 52.5 from 53.4 in December, which suggests that the monetary policy committee have limited scope to cut interest rates as the projected slowdown in services has yet to appear.

The recent price action surrounding the Euro suggests that the single currency is struggling to hang on to the recent gains made against the majors as a host of negative economic reports suggests the economy is beginning to feel the threat of U.S led global recession.

The Euro declined heavily against both the Pound and the Dollar yesterday as growth in European service industries accelerated at the slowest pace in over four years in January.

The PMI index dropped to a reading of 50.6, the lowest level since July 2003, from 53.1 the previous month with a figure above 50 indicating expansion in the sector. The slowdown in growth challenges the staunchly hawkish stance of the ECB's governing council, who feel confident that the Euro-zone is strong enough to cope with a cooling U.S economy.

Therefore, it will interesting to see whether the chairman, Jean-Claude Trichet, will recognise the very real threat to economic expansion on Thursday but the Euro may find support if the tone of the statement focuses on inflation.

The broad based Dollar strength surprised many investors yesterday as the U.S currency rallied against both the Pound and the Euro despite reports that growth in U.S services industries unexpectedly contracted by the most since the 2001 recession.

The ISM non-manufacturing index plummeted to a reading of 41.9 from 54.4 the previous month as the housing slump gathered momentum and spending froze. U.S services reflect growth in almost 90% of the U.S economy and this stunning slump will heighten concerns that the U.S in the midst of a recession that threatens the pace of the global economy.

Amid the political stalemate surrounding the hotly contested democratic seat, Barrack Obama and Hilary Clinton will extend their struggle for the presidential candidacy into next month while the Dollar may struggle to consolidate on the recent gains made in the face of yet more negative economic data.

Nevertheless, the recent positive sentiment surrounding the U.S currency can be derived from the market's interpretation that the Fed have acted to ensure the future outlook of growth remains positive.

Data Released 6th February

U.S 13:30 Unit Labour Costs (Q4)

- Productivity

written by Adam Solomon