Daily Insight

The Pound bounced back against the majors yesterday as the UK currency rallied 0.4%higher versus the Dollar following reports that UK retail sales rose more than twice as much in January.

The Office of National Statistics said that sales climbed 0.8% from December despite forecasts of a smaller 0.2% gain and that represents the largest increase for 11 months.

In the aftermath of the report, the Pound rose against both the Euro and the Dollar amid speculation that a revival in consumer spending will stoke inflation in the face of slowing economic growth.

Tighter lending conditions has hampered consumer spending over the past quarter while the increased level of volatility sweeping across financial markets led to the Bank of England cutting interest rates on two occasions in just three months.

However, the report yesterday combined with bullish outlook from the Confederation of British Industry suggests that strong retail growth will steer the economy away from a recession while rising inflation will prevent the Bank of England from lowering interest rates too aggressively over the coming months.

The positive sentiment surrounding the Euro continued yesterday as the single currency consolidated on the recent gains made against the Dollar and may continue the upward momentum today amid reports that European service sector growth probably accelerated in February.

However, a separate gauge of the report may show that PMI manufacturing slowed in the 15 countries sharing the Euro as weakening demand from overseas slows exports and factory output.

The tone of recent reports suggests that the Euro-zone economy is feeling the pressure from a U.S led economic slowdown while the Euro remained resilient yesterday despite news that the EC lowered growth forecasts to weakest pace in 3-years.

The host of negative economic reports has weighed heavily on Dollar sentiment this week as the U.S currency falls to a near three-week low against the Euro amid speculation that the Fed will cut interest rates to prevent a recession while the ECB keep rates unchanged.

The Dollar has fallen against 12 of the 16 most actively traded currencies this week following reports that manufacturing in the Philadelphia region contracted by the most in seven years.

The conflicting views of the Fed against other Central Banks around the world will probably see the Dollar decline further over the coming weeks as we build up the FOMC rate announcement at the end of the month.

Data Released 22nd February

EU 09:00 Flash Manufacturing PMI (February)

Flash Services PMI

EU 10:00 Industrial Orders (December)

written by Adam Solomon