The recent revival in Sterling sentiment was cut short yesterday as the UK currency paired losses against both the Euro and the Dollar following a mixed bag of economic data.

The overwhelming rise in food and energy costs saw UK factory-gate inflation match the fastest annual pace since 1991 while a separate report showed that manufacturing also rose by more than initial forecasts, which all but diminishes the prospect of a further Bank of England rate cut in April.

Producer prices increased at an annual pace of 5.7% in February as the cost of raw materials spiralled out of control and increased by the most since records began in 1986.

The monetary policy committee have the unenviable task of balancing the upside risks to price stability against a slowing economy but with inflation expected to exceed the 3% barrier later this year, the Bank may not have the scope to reduce interest rates as aggressively.

However, the Pound declined 0.2% against the Euro at the close of trading last night and further downside movement may be forthcoming amid fresh reports that the UK housing slump deepened in February.

According to a report from the Royal Institution of Chartered Surveyors, house prices fell by the most in 18-years and to the worst level since the eve of the last recession.

The Euro's dramatic appreciation against the Dollar this year has seen the pair rally beyond the 1.5000 barrier over the past week and that has caused great concern within the European Central Bank as the chairman, Jean-Claude Trichet expressed yesterday morning.

In a statement to reporters in Switzerland, Trichet said that he was concerned about excessive moves in exchange rates and his opposition to brutal fluctuations may alter the ECB's relentlessly hawkish stance on inflation and recognise the possible impact on economic growth.

The Euro fell as much as 0.3% against the Dollar in the aftermath of the statement but Trichet's ability to weaken the Euro is limited as the economic reports point to further upside risks to price stability.

In terms of economic data, the Euro may struggle to recapture the momentum against the Dollar as the focus switches to the ZEW survey on German investor confidence. The index is expected to fall in March amid concerns that the U.S recession will eventually spread to Europe.

The Dollar has struggled to consolidate on the gains made against the majors over the past month and the dire outlook for the U.S economy has seen the Federal Reserve slash interest rates aggressively since December and further monetary easing is likely in March.

Nevertheless, the U.S currency rebounded against both the Euro and the Pound yesterday amid speculation that the trade balance report this afternoon will show that the deficit in goods and services actually shrank in January as a weaker Dollar made U.S made goods more attractive.

However, oil futures closed above $107 a barrel last night and rising energy costs will feed into inflation and threaten the pace of economic expansion. The CPI report on Friday will probably show renewed risks to inflation as food prices have also risen by as much as 50% over the past two years with retailers refusing to absorb rising costs.

Data Released 11th March

UK 09:30 DCLG House Prices (January)

GER 10:00 ZEW Index (March)

U.S 12:30 Trade Balance (January)

written by Adam Solomon