Following on from last week, the diverging interest rate expectations between Europe and the U.S saw the Dollar plunge to a fresh record low against the Euro while also breaching the 2.00 level versus the Pound as the FOMC slash interest rates by a further 125 pips in the month of February. In addition, the weakening sentiment surrounding the U.S labour market further emphasized the problems within the economy as Nonfarm payrolls dropped for a second consecutive month and the Fed announced plans to pump $200 billion into the banking system to address liquidity pressures. The timing of the announcement was certainly suspect as it coincided with the weak U.S employment report and may have been designed to prevent a Nonfarm payrolls induced collapse in the stock market. The severity of the decline in the labour market combined with the rise in jobless claims indicates that the U.S economy is already in the midst of a recession and a sharp drop in retail sales will also weigh heavily on dollar sentiment. Despite a considerably weaker currency, the U.S trade deficit is not expected to show any improvement for the month of January while higher commodity prices will hit the import side and push up inflation.

Despite the fundamental lack of UK economic data, the positive sentiment surrounding the Pound saw the currency soar to a year to date high against the U.S Dollar while the Pound also rallied versus the Euro despite a host of positive economic reports coming out of the Euro-zone. The renewed price action surrounding Sterling suggests that the market is anticipating higher inflation numbers this morning with the PPI index heading higher following the rise in food and energy costs. The focus this week will undoubtedly fall on Wednesday’s budget presentation where the Chancellor, Alistair Darling, will have limited to scope to boost economic activity. The Pound is likely to continue the upward momentum against the majors this week as rising inflationary pressures and a rebound in retail sales keeps the Bank of England from cutting interest rates too aggressively over the coming months.

The Euro smashed through the 1.5000 barrier against the Dollar to record a high of 1.5463 last week following a combination of weak U.S employment data and hawkish commentary from the European Central Bank leads to speculation that the economy will survive a U.S led economic slowdown. The contrast in sentiment was further emphasized by the events that preceded the monthly U.S job report while the ECB are not particularly concerned with containing liquidity pressures and governing council member, Alex Weber, even warned that the market is underestimating the upsides risks to inflation. The Euro will probably make further gains against the ailing U.S Dollar this week as the focus switches to the harmonized consumer price index on Friday with the gauge expected to confirm the trends above 3.2%.

Data Released 10th March

UK 09:30 Producer Price Index (February)

U.K 09:30 Industrial Production (January)

U.S 14:00 Wholesale Inventories (January)

written by Adam Solomon