Daily Insight

Over the past week, the Pound has succumbed to speculation surrounding an impending UK interest rate cut and fallen to a near record low against the Euro while speculation over a U.S led global recession has caused an increased level of volatility across financial markets.

Nevertheless, the Pound unexpectedly rose by the most against the Dollar in over a week yesterday and also made modest gains versus the Euro following a rally in European and Asian stocks, prompted by demand for higher-yielding assets.

By the close of trading last night, the Pound had registered gains against all but two of the 16 most actively traded currencies as the UK currency found support from a rebound in the UK stock market.

However, any further upside momentum is likely to be temporary as the economic outlook continues to deteriorate and the Bank of England resumes monetary easing. In terms of economic data, a report from the Royal Bank of Scotland may show that growth in UK service industries fell to the second slowest pace in almost two years in January.

The sustained drop in service sector growth may just be the catalyst for the Pound's demise as speculation will mount that the MPC will be forced into a more aggressive action this Thursday.

The tentative price action surrounding EURUSD suggests that a move towards the 1.5000 barrier may be imminent as we build up to the ECB interest rate announcement and accompanying press conference this Thursday.

Recent economic data points to slower growth in the Euro-zone while the volatility surrounding financial markets may alter the Central Bank's hawkish stance on monetary policy.

However, the annualised pace of inflation has remained above 3.0% for the past three months and recent commentary from a number of ECB officials seems to indicate that policy makers are more concerned with the threat of higher inflation than the impact of a slowing economy.

That sentiment was also reflected in the data released yesterday as a measure of producer price inflation rose from 4.2% in November to 4.3% the following month to indicate that rising prices are a major problem in the region.

In terms of economic reports, the Euro may find some support this morning as service sector growth is expected to hold steady in January while strong consumer spending in France may boost retail sales.

The Dollar has been struggling against most of the major currencies recently as the fallout from the first contraction in Nonfarm payrolls and aggressive monetary easing from the Federal Reserve heightened concerns that the U.S economy is on the brink of a recession.

However, the Dollar's overall resilience to a host of negative economic reports is not entirely surprising considering economists are viewing the steepest cuts in seven years as supportive for the future outlook of the economy.

The Dollar has gained 1% versus the Euro since slumping to an all-time low of 1.4967 and the U.S currency's stubborn resistance continued yesterday as orders for U.S factories rose by the most in five months in December.

The 2.3% rise in orders follows a revised increase of 1.7% the previous month and suggests that an increase in business investment is growing despite a contracting labour market.

Data Released 5th February

EU 09:00 Services PMI (January)

U.K 09:30 CIPS Services PMI (January)

EU 10:00 Retail Sales (December)

U.S 15:00 ISM non-manufacturing (January)

written by Adam Solomon