Daily Insight

The relentless decline of the Pound has seen the UK currency fall 11% against the Euro since mid August and also plummet to a near 1-year low versus the Dollar as speculation continues to build that the Bank of England will cut interest rates in February.

Nevertheless, the Pound consolidated on the recent gains made against the Euro while also remaining largely unchanged versus the Dollar despite a host of mixed economic report that have done little to change sentiment.

Public finances and UK money supply grew more than expected in December while a separate report showed a sustained drop in mortgage approvals. According to a report from Rightmove plc, UK house prices fell for a third straight month in January as the average costs of home declined 0.8% from the previous month while the annual price gain slowed to 3.4%, which represents the lowest level since 2005.

The decade long housing boom appears to be coming to an end as tighter credit conditions and falling home values requires the Bank of England to act and lower borrowing costs aggressively over the coming months.

The Pound is likely to continue to downward momentum against the majors as the UK currency fell against 10 of the 16 most actively traded currencies yesterday and tested the support around 1.9350 versus the Dollar.

The Dollar rallied against both the Euro and the Pound yesterday as economists speculate on the probability that the Federal Reserve will deliver a 75 basis point cut at the end of January.

Fed fund futures have currently priced in a 50 basis point cut on the 30th of the month but recent comments from the chairman of the Fed, Ben Bernanke has indicated that the FOMC will need to step up monetary easing in the faint hope of preventing a U.S recession.

Despite a host of negative economic data and an impending rate cut, the Dollar has started the week in a positive vain as traders return to work today following the Martin Luther King holiday.

The weakening sentiment surrounding the Euro continued yesterday as the single currency fell considerably against the resurgent U.S Dollar amid a host of negative economic reports and increasingly bearish comments from a number of ECB officials.

The European Central Bank have adopted a staunchly hawkish stance on monetary policy as growth in the economy continued to accelerate despite a U.S economic slowdown and the threat of a global recession.

However, a recent spate of economic reports have shown that growth in manufacturing and service industries unexpectedly contracted in December while business confidence in Germany declined to lowest level in two years.

In addition, one of the reasons for the ECB's reluctance to lower interest rates can be attributed to rising inflationary concerns with consumer prices remaining above 3.0% for the past two months.

Nevertheless, a report yesterday showed that producer prices in Germany dropped 0.1% in December as wholesale prices fell for the first time since October 2006.

Data Released 22nd January

U.K 11:00 CBI Monthly Trends Survey (December)

written by Adam Solomon

The recent revival in Sterling sentiment continued yesterday as the UK currency rallied against almost all of the 16 most actively traded currencies amid a distinct lack of economic data that failed to provide any further indication on the probability of an interest rate cut next month.

The Pound has also found support in the strength of the UK labour market with unemployment falling to the lowest level since 1975 as companies stepped up hiring following the fastest pace of economic expansion since 2004.

Jobless claims fell 6,400 in December while average hourly earnings, including bonuses rose 4% in the 3 months through to November and the report shows that the UK economy remained strong enough to spur jobs growth before a slowdown caused by higher credit costs.

Rising personal income should provide a boost to consumer spending but a recent report from the British retail consortium showed that sales could slow of the next quarter as higher prices and falling home values dampen sentiment.

Therefore, the focus this morning will fall on the UK retail sales numbers and the report may follow the BRC sales monitor with the annual pace of growth plummeting to 3.3% in December from 4.4% the previous month.

The positive momentum surrounding the Euro has been severely tested this week as the single currency failed to make any gains against the Dollar yesterday and made further losses versus the Pound amid reports that the European trade balance actually narrowed by more than expected in November.

An obvious slowdown in the import and export component showed that the European economy is beginning to feel the effects of a global credit crunch and that may prompt a change in sentiment from the ECB's governing council.

However, the majority of policy makers are still more concerned with the upside risks to inflation than the apparent slowdown in economic growth and the Euro will continue to flourish as the ECB maintains a hawkish stance on monetary policy.

The Dollar has recovered some losses against the Euro in recent trading sessions and also remains largely resilient versus the Pound despite the worsening economic outlook that may see the Federal Reserve lower interest rates by more than 50 basis points this month.

The FOMC have lowered borrowing costs by 1 percentage point since October alone but the degree of the economic slowdown has brought the economy to the brink of a recession and the Fed must act now to provide some relief to the consumer.

In addition, the annual pace of inflation rose at a much slower pace than anticipated in December, signalling that prices may decelerate in the months ahead after recording its fastest pace in 17-years in 2007.

In addition, the Dollar failed to find any support following a shockingly weak Philly Fed index, which showed that manufacturing output fell to the lowest level in over 6-years.

Data Released 18th January

U.K 09:30 Retail Sales (December)

U.S 15:00 Leading Indicators (December)

U.S 15:00 Michigan Sentiment (January Prelim)

written by Adam Solomon

The Pound was actually one of the few currencies that rallied against the U.S Dollar yesterday while also making modest gains versus the Euro following reports that UK inflation held above the Bank of England's 2% target for a third consecutive month in December.

Consumer prices unexpectedly rose 2.1% from a year earlier, which was the same as in November and slightly ahead of initial forecasts following a substantial increase in food and energy costs.

Earlier this week, a separate gauge of producer price inflation showed that UK factories increased prices at the fastest annual pace since 1991. Rising inflationary pressures will be closely watched by the monetary policy committee and the reports the week may add to the case for fewer interest rate cuts this year.

As a result, the Pound made modest gains against the majors before news that Tesco plc, the UK's biggest retailer, called for the BoE to lower borrowing costs more aggressively after sales over the holiday period fell short of analyst estimates.

The MPC reduced interest rates in December for the first time in two years as the threat to the economy from higher credit costs outweighed concerns over rising consumer prices.

Therefore, the Bank of England may have to accept that inflation will remain above the 2.0% target this year and continue cutting interest rates in order to prevent economic growth from slowing.

The Euro failed to take advantage of broad Dollar weakness yesterday as investor confidence in Germany fell to the lowest level in 15-years on concerns that a U.S recession will trigger an economic slowdown in Europe's largest economy.

The ZEW centre for economic research released its index of investor and analyst expectations, which fell to a reading of minus 41.6 in January, down from minus 37.2 the previous month.

Elsewhere, a separate report in Germany showed that economic growth slowed to 2.5% in 2007, down from 2.9% in 2006, which was the fastest pace of expansion since 2000.

The report provides a further indication that European economic growth will continue to slow this year but with the ECB still focused on rising inflationary pressures and further monetary tightening, the Euro may continue to test the record highs achieved against the Pound and the Dollar.

The Dollar declined against almost all of the 16 most actively traded currencies yesterday following report that U.S retail sales and producer prices both contracted in the month of December, leading to further speculation that the economy is poised to fall into recession.

Sales at retailers unexpectedly fell in December, dropping 0.4% from the previous month and posting the first decline since June to finish off the worst year of sales since 2002.

A recent statement from the chairman of the Federal Reserve, Ben Bernanke, indicated that policy makers are deeply concerned with the current risks to economic growth and that will surely prompt an aggressive cut in U.S interest rates later this month.

Elsewhere, a separate report showed that producer prices actually fell in December despite forecasts of a modest increase as wholesale prices fell 0.1% following a 3.2% surge in November.

The unexpected drop in factory prices will be closely watched by the Federal Reserve and a drop in consumer prices over the same period may convince the FOMC to lower interest rates by 50 basis points.

Data Released 16th January

UK 09:30 Average Earnings (3 months to November)

UK 09:30 Claimant Count / Unemployment (December)

EU 10:00 Final HICP (December)

U.S 13:30 Consumer Price Index (December)

U.S 13:30 Real Earnings (December)

U.S 14:00 TICs Net Capital Inflows (November)

U.S 14:15 Capacity Utilisation (December)

U.S 14:15 Industrial Production (December)

U.S 18:00 NAHB Housing Market Index (January)

U.S 19:00 Fed Beige Book Published

U.S 15:00 Business Inventories (November)

written by Adam Solomon

The negative sentiment surrounding the Pound continued yesterday as the UK currency plummeted to fresh record lows against the Euro while also consolidating around 1.9550 versus the U.S Dollar despite a surprisingly strong report on factory-gate inflation.

UK factories increased prices at the fastest annual pace since 1991 last month as output prices increased 5% from this stage a year ago and the report illustrates the persistent inflationary concerns that may reduce the Bank of England's scope to cut interest rates in the face of slowing growth.

The Pound failed to find any support after the MPC elected to leave rates unchanged at 5.50% this month with most economists backing a 25 basis point reduction in February.

However, the tone of the report yesterday may diminish speculation of more aggressive monetary easing in the months ahead as the Bank attempts to balance the threat of inflation from higher energy prices against a forecast for a sharp economic slowdown.

Nevertheless, faster producer prices may take some time to feed through to consumer prices with the annual rate of inflation expected to return to the Banks 2.0% target in December.

The consumer price index is expected to show that prices slowed from 2.1% in November, giving the Bank the room to cut interest rates next month.

The Dollar fell to within a cent of the record low versus the Euro and looks poised for further downside movement amid speculation that U.S interest rates will drop below the benchmark lending rate in the Euro-zone for the first time in three years.

The U.S currency has extended three weeks of declines and the U.S currency may struggle to stem the losses as we approach the FOMC rate announcement at the end of January.

Fed Fund Futures are currently pricing in a 40% probability that the Fed will slash rates by as much as 75 basis points this month after comments from the chairman, Ben Bernanke, that the U.S needs to adopt a more aggressive policy on cutting rates.

The unrelenting appreciation of the Euro is showing few signs of slowing as the single currency rallied to a fresh record high against the Pound and also looks poised for an assault on the 1.5000 level versus the Dollar.

However, some sectors of the Euro-zone are already voicing their concerns of a strong currency with France's European Affairs Minister Jouyet complaining that "the country cannot live with the Euro at this level with three other currencies which are weak."

The robust growth in the European economy can be largely attributed to export growth and demand from overseas. However, weaker economic growth in the U.S and the UK will cool demand for European based goods while a strong Euro will alienate the region and see importers source their products elsewhere.

In terms of economic data, the Euro may struggle to make further gains this morning as investor confidence in Germany probably slowed in January and to the lowest level in 15-years on concerns that a U.S recession would weigh heavily on economic growth in the region.

Data Released 15th January

UK 09:30 Consumer Price Index (December)

GER 10:00 ZEW Index (January)

U.S 13:30 Retail Sales (December)

U.S 13:30 Producer Price Index (December)

U.S 13:30 Empire State Index (January)

U.S 15:00 Business Inventories (November)

written by Adam Solomon

Following on from last week, the Pound plummeted to a fresh record low against the Euro and also declined to the lowest level in almost a year versus the Dollar as the Bank of England decided to leave UK interest rates on hold at 5.50%.

In the build-up to the announcement there was widespread speculation that the MPC would reduce the benchmark lending rate by another 25 basis points given the negative outlook for the UK economy and the seemingly endless line of weakening economic reports.

Therefore, it was a touch surprising that the Pound didn't rally against the majors and actually made further losses versus the Euro as we tentatively approach the 1.3000 level.

The downward momentum surrounding the Pound continued on Friday as growth in the UK manufacturing sector unexpectedly contracted in November and fell to the lowest level in five years following a drop in consumer spending.

The report underlines the reliance on consumer spending and retail growth as the primary source of economic expansion. Factory output declined by 0.1% in November following a modest increase the previous month as manufacturers face the threat of slowing export demand as the U.S economy stands on the brink of recession.

The focus this week will fall on the latest round of inflation data and all eyes will be fixed on the consumer price index on Tuesday as the market starts pricing in a 25 basis point cut in February.

The Euro has been struggling to consolidate above 1.4700 versus the Dollar but the single currency managed to make substantial gains against the majors on Friday as the ECB maintained their hawkish bias towards raising interest rates in the face of rising inflationary pressures.

A spate of weak economic reports and an overall drop in risk appetite has seen the Euro fail to stay above 1.4800 for the third time this month although the current price action does not necessarily reflect the dramatic shift in interest rate expectations.

Wholesale prices in Germany and industrial production in the Euro-zone were both softer than initial expectations but although the economic outlook continues to sour, the Euro will probably hit 1.5000 against the Dollar amid contrasting interest rate expectations.

The tone and language used by the chairman of the Central Bank, Jean-Claude Trichet continues to sway towards further monetary tightening as the annualised pace of inflation remained above 3.0% for the second consecutive month.

Data Released 14th January

UK 09:30 Producer Price Index (December)

EU 10:00 Industrial Production (November)

written by Adam Solomon

The Pound fell to a fresh record low against the Euro last night and to the lowest level in nearly a year versus the Dollar despite the Bank of England's decision to leave UK interest rates unchanged at 5.50%.

In the build up to the monthly announcement there was intense speculation surrounding
a back-to-back rate cut in January but the monetary policy committee elected to assess the effects of last month's reduction before further monetary easing in February.

Tighter credit conditions, weakening consumer spending and a slowing housing market will require that the Central Bank take action in the near term but policy makers must weigh up those risks against rising inflationary pressures with oil breaching $100 a barrel for the first time. Food and energy costs have risen to a record level over the past quarter and the MPC are concerned that the pace of inflation will accelerate well beyond the 2.0% target.

Initially, the Pound made modest gains against the majors but fell to a fresh record low by the close of trading last night amid increased speculation of an impending rate cut in February.

The UK currency declined against all 16 of the most actively traded currencies and the deterioration of economic data combined with the gloomy outlook for the economy is leading many analysts to believe that the Pound will repeat the movements of the Dollar in 2007.

The negative sentiment surrounding the UK currency is likely to continue this morning amid reports that industrial production probably weakened in November following the disappointing manufacturing numbers last week.

Although the U.S currency rose to a nine month high against the Pound yesterday, that was an indication of Sterling weakness rather than Dollar strength and the greenback came under further pressure against the Euro as the Fed chairman, Ben Bernanke, signalled "deeper" rate cuts to come.

The bleak outlook for the U.S economy means that that the FOMC must balance slowing growth against faster inflation and his speech in Washington yesterday, Bernanke fuelled speculation of a 50 basis point cut at the end of this month.

In terms of economic data, the Dollar may decline further this afternoon as the U.S trade deficit is expected to widen for a third consecutive month in November as consumer demand for imported oil rose to the highest level in record.

The Euro rallied against both the Pound and the Dollar yesterday as the European Central Bank left interest rates unchanged at 4.00% and retained a staunchly hawkish stance on the economy and inflation.

The outcome of the meeting was a non-event for the Euro but the tone and language used in the accompanying statement seemed to suggest that policy makers are still looking at the possibility of raising interest rates in the near-to-medium term.

The chairman of the Central Bank, Jean-Claude Trichet, didn't include the term "strong vigilance" in his statement but his commitment to controlling inflation sent the Euro to a record high against the Pound.

A number of members of the ECB's governing council have publicly expressed their concerns over rising inflationary pressures and policy makers seem prepared to act pre-emptively on a rate increase.

With regards the outlook for the Euro-zone economy, Trichet acknowledged that the risks to growth are to the downside but recent economic data remains positive and the strong momentum surrounding the economy will continue.

Data Released 11th January

UK 09:30 Industrial Production (November)

- Manufacturing Output

U.S 13:30 Export Prices (December)

- Import Prices

U.S 13:30 Trade Balance (November)

written by Adam Solomon

The Pound has endured a torrid time in recent weeks and yesterday was no exception as the UK currency plummeted to a fresh record low against the Euro while consolidating under 1.9600 versus the U.S Dollar.

The unrelenting downside momentum surrounding Sterling is geared towards today's Bank of England interest rate announcement where the monetary policy committee will probably resist calls for a back-to-back interest rate cut in February.

A recent spate of negative economic reports has revived speculation that UK interest rates will fall by another 25 basis points while the derivatives market has priced in a 60% chance of a cut.

Both consumer confidence and a gauge of leading economic indicators deteriorated over the past month while the latest round of housing indices points to slowing growth in the sector.

Nevertheless, trader and analysts alike are split on the outcome of the decision as the Bank of England are likely to hold interest rates at 4.0% this month and await further evidence of the impact from the previous rate cut.

In addition, growth in UK service industries accelerated way beyond initial forecasts and provided an indication that the robust pace of growth in the sector will support the economy in the months ahead.

The heightened sense of anticipation surrounding the rate announcement will see an increased level of volatility in the currency market and we can expect the Pound to rally against the Dollar if the MPC decide to wait until next month.

Elsewhere, the European Central Bank are also due to convene today and announce that interest rates in the 13 nations sharing the Euro will probably remain unchanged at 4.0% as policy makers retain a tightening bias in the wake of rising inflationary pressures.

Record high food and energy costs has sent consumer prices hurtling towards 3.0% year-on-year in November and that has seen the ECB convey a staunchly hawkish stance on monetary policy while the governing council may even raise interest rates this year.

The fallout from the collapse of the U.S subprime mortgage market has heightened concerns of a global economic slowdown that has seen Central Banks in the UK and U.S begin monetary easing.

Nevertheless, growth in the Euro-zone has been robust, particularly in Germany where factory orders and overseas demand have continued to rise despite the overwhelming appreciation of the Euro.

As a result, the ECB has remained focused on tackling the upside risks to price stability and with oil prices breaching the $100 a barrel level over the past month, policy makers may forced into action sooner rather than later.

The bleak outlook for the U.S economy and the negative sentiment surrounding recent economic reports has increased speculation that the Federal Reserve will slash interest rates by a further 50 basis points this month.

However, the resilience of the Dollar in recent sessions has seen the U.S currency rally to a five-month high against the Pound while also holding steady versus the Euro.

The Federal Open Market Committee have lowered U.S interest rates by 1 percentage point since October and yesterday the chairman, Ben Bernanke, came in for some criticism from investors that the Fed had not been aggressive enough in order avert a recession.

The disturbingly weak Nonfarm payrolls report last Friday has heightened concerns and prompted further speculation that policy makers will cut rates by half a percentage point on the 30th January.

Data Released 10th January

UK 12:00 BoE Rate Announcement

UK 09:30 Trade Balance (November)

EU 12:45 ECB Rate Annoucement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 5th January)

U.S 15:00 Wholesale Inventories (November)

written by Adam Solomon

The Pound tumbled against the Dollar yesterday, touching a fresh five month low against the U.S currency while also snapping three days of consecutive gains versus the Euro following reports that UK consumer confidence fell to the lowest level in 10 months.

As a result, the Pound weakened against 15 out of the 16 most actively traded currencies as the report from the Nationwide Building Society coincided with news that the BRC sales monitor had dropped to the lowest level in 21 months.

Recent economic reports have pointed to slowing growth in the retail sector while concerns over a fresh credit crunch will have a negative impact on sentiment.

Elsewhere, the Pound was left reeling from news that Gordon Brown was left "speechless" when asked yesterday whether he would reappoint Mervyn King as the governor of the Bank of England. King was subject to criticism last year after the Bank failed to react to the crisis at Northern Rock.

Brown's failure to publicly give his backing to King will do little to inspire confidence, particularly as we build up to the Bank of England rate announcement tomorrow.

The outcome of the meeting is finely balanced with the surprising growth in UK service industries prompting speculation that the MPC will refrain from cutting rates this month. However, the report on consumer confidence yesterday will heighten concerns that spending will slow and combined with falling home values, the UK economy is poised for a tough test in the months ahead.

The surprising resilience of the Dollar continued yesterday as the U.S currency continued to make gains against the Pound despite further speculation that the Federal Reserve plan to cut interest rates by half a percentage point in an attempt to ward off a recession.

In terms of economic reports, the Dollar also stood firm as pending home sales plummeted by more than initial forecasts in November with the index falling 2.6% to a reading of 87.6 following a 3.7% gain in October.

The report from the National Association of Realtors signals that further deterioration in the housing sector is likely over the coming months despite rates falling by 1 percentage point since October.

There was an increased sense in instability that swept through financial markets yesterday and despite a mixed bag of economic data, the Euro stood virtually unchanged against the Dollar, while making modest gains versus the Pound.

The positive sentiment surrounding the single currency came despite reports that retail sales fell 1.4% from a year earlier, which represents the sharpest decline in eleven years.

Nevertheless, any Euro losses were short-lived as a separate report in Germany showed that factory orders had increased beyond expectations over the same period. Despite the overwhelming strength of the Euro over the past year, demand from overseas remains strong while growth in the domestic market is causing a rise in manufacturing orders.

The tone of the report and the overall economic outlook in Europe's largest economy is the main reason why the ECB will maintain a hawkish stance on Thursday and keep interest rates unchanged at 4.0%.

The Euro may continue to make gains against Sterling as we build-up to the lunchtime announcement and a host of positive economic reports are expected to show that growth in German retail sales and industrial output accelerated over the same period.

Data Released 9th January

GER 07:00 Retail Sales (November)

GER 11:00 Industrial Production (November)

EU 10:00 Final GDP (Q3)

written by Adam Solomon

Despite making modest gains against the majors on Friday, the Pound resumed the downward momentum this morning and plummeted to a five-month low versus the U.S Dollar after the Prime Minister, Gordon Brown, said the economy faces "tough decisions" in 2008.

In a statement to Sky News, Brown said that he wants to "control inflation and achieve low interest rates for homeowners and low mortgages." The tone and language used in the statement was interpreted as an indication of further monetary easing to come and that will raise speculation of a back-to-back rate cut this week.

The subsequent reaction in the market saw the spread between UK government bonds widen significantly as appetite for risk aversion increased and investors sought safety in short-term securities.

Thus far, the Pound has been one of the worst performing currencies this year and that trend is likely to continue in the near-to-medium term as the Bank of England look to cut rates at least once more before March.

In terms of economic data, the unexpected pick up in service sector growth has done little to overshadow recent evidence to suggest that growth in housing is faltering while consumer confidence has declined in the wake of the Northern Rock fiasco.

The positive sentiment surrounding the Euro and the recent spate of positive economic reports ended in spectacular fashion yesterday as the ECB sentiment index showed that economic confidence had fallen to the lowest level in almost two years.

An index of business and consumer sentiment in the Euro-region fell to a reading of 104.7 in December, which represents the lowest reading since March 2006 as orders weakened and rising food and energy prices pushed up inflation.

In addition, expansion in European service and manufacturing industries have slowed in recent months while consumer confidence is dwindling as oil prices continue to trend higher.

A separate report yesterday showed that a gauge of producer prices accelerated to the highest level in almost a year in November, which means that manufacturers will be forced to pass on higher costs to the consumer and therefore fan inflation.

As a result, the Euro declined against both the Pound and the Dollar while the focus switches to the retail sales report this morning for an indication of how the sector performed amid rising food and energy costs.

The negative sentiment surrounding the U.S economy has seen the Dollar continue to decline against most of the 16 most actively traded currencies but the greenback managed to stem the losses yesterday and actually rise to a five month high versus the Pound.

The overwhelming decline in U.S non farm payrolls led to sharp losses in the Dollar and renewed concerns that the economy was on the brink of recession.

As a result, speculation regarding a January rate cut has intensified and the Fed fund futures market is currently pricing in a 70% chance of a 50 basis point reduction on January 30th.

In terms of economic data, the Dollar may come under renewed pressure against the majors today as further evidence on the U.S housing recession will do little to lift sentiment.

The number of Americans agreeing to buy existing homes is expected to fall for the first time in three months in November, signalling that further deterioration in the sector is likely over the coming months.

Data Released 8th January

UK 00:01 BRC Retail Sales Survey (December)

EU 10:00 Retail Sales (November)

GER 11:00 Industrial Orders (November)

U.S 15:00 Pending Home Sales (November)

written by Adam Solomon

Following on from last week, the Pound came under real pressure over the festive period, falling to the lowest level on record against the Euro and crashing to a four month low versus the Dollar as the outlook for the UK economy soured and speculation intensified over an impending rate cut.

However, the Pound snapped a three day losing streak on Friday and actually made modest gains against the majors after an index of UK service industries showed that growth in the sector unexpectedly accelerated in December.

The report from the Chartered Institute of Purchasing and Supply showed that service sector growth accelerated to a reading of 52.4 last month to rebound from the lowest level in four years in November.

Initially, economists had forecast a further drop in the index but the unexpected increase saw the Pound rally against both the Euro and the Dollar as the report cooled speculation of a back-to-back rate cut in January.

The monetary policy committee have the unenviable task of balancing a slowing economy against rising inflationary pressures as credit costs continue to spiral out of control and falling home values dampen consumer sentiment.

The price of oil continues to hover just above $100 a barrel and rising energy and food costs threatens to curtail the pace of economic expansion while fanning inflation. The focus this week will inevitably fall on the Bank of England rate announcement on Thursday and the outcome of the meeting is finely balanced.

The Pound has dropped 6% against the Dollar since reaching a 26-year high in the fourth quarter of last year but the monetary policy committee may decide to keep the benchmark lending rate at 5.5% in January and that may provide some much needed support for Sterling.

The unrelenting rise of the Euro continues to dominate the market as the single currency looks poised to test the resistance around the 1.5000 level versus the Dollar while also rising to a fresh record high against the Pound.

The staunchly hawkish stance of the European Central Bank combined with the surprisingly consistent spate of positive economic reports has prompted speculation that the governing council will need to lift interest rates in the face of rising inflation.

European consumer prices have remained above 3.0% for the second consecutive month in December while the overwhelming rise in exports out of Germany means that the economy should withstand a global economic slowdown.

In addition, the current state of the labour market is in stark contrast to that of the U.S as unemployment in Germany fell to the lowest level in 6-years last month. Recent comments from a number of ECB officials have focused on the need for tighter monetary policy, particularly when you consider that energy prices continue to reach new highs.

Although the ECB are likely to keep interest rates unchanged at 4.0% this week, the tone and language used in the accompanying statement will be heavily scrutinized as the market looks for any indication of future policy.

The Dollar declined against the all of the 16 most actively traded currencies on Friday as the eagerly awaited U.S employment report showed that the economy added just 18,000 jobs to payrolls in December.

The weakening U.S labour market will be cause for concern among policy makers as hiring slowed by much more than forecast and the unemployment rate jumped to the highest level in two years.

The jobless rate actually increased to 5.0% from 4.7% in November as the report indicated more damage to the economy from the housing slump and reduced access to credit.

Prior to the release of the report, many economists anticipated a rise of 85,000 jobs last month so the scale of the decline may influence the Federal Reserve to cut interest rates for the fourth month in a row and by half a percentage point in order to ward off a recession.

Payrolls have fallen for the first time since July 2003 following job losses in manufacturing, construction and the retail industry while a separate report showed that service sector growth also cooled in December.

Data Released 7th January

EU 10:00 Producer Price Index (November)

EU 10:00 Consumer Confidence (December)

- Industrial Confidence

EU 10:00 Business Climate Index (December)

EU 10:00 Unemployment (November)

written by Adam Solomon