Daily Insight

Sterling gained versus a generally weaker dollar Friday as traders continued to mull the previous sessions stronger than expected UK retail sales data. Numbers released Thursday revealed retail sales jumped 0.8% in January, reversing the previous months 0.4% decline and trumping expectations for a 0.3% recovery. Experts reckon the data means the Bank of England may not be as aggressive with its rate cutting programme as previously hoped, although another reduction is expected in the spring.
Today, sterling is low versus the Dollar as house price inflation data has fallen to a 22 month low to 1.4%. There is a limited amount of data out in the UK this week but what is available could be important in setting the tone in the run up to the MPC meeting in March. The data is likely to focus on the UK housing market and in particular Februarys Hometrack and Nationwide price survey.

GBP/USD support level is 1.9360
GBP/USD resistance is 1.9695

There were gains for the Euro, although these were pared on news that Euro zone industrial orders fell 3.6% in December from the previous month and rose 2.1% year-on-year. Trichet is scheduled to speak on two occasions this week and the markets will be closely watching to see if there is any softening in his tone.

GBP/EUR support level is 1.3197
GBP/EUR resistance is 1.3285

Data released 25th February
US 15:00 existing homesales

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

The recent negative sentiment surrounding the Pound continued yesterday as the UK currency plunged to within 50 pips of the 12 month low versus the Dollar and also paired losses against the resurgent Euro following the surprisingly dovish minutes from the Bank of England's last policy meeting.

The nine-member monetary policy committee voted 8-1 in favour of cutting UK interest rates in February with David Blanchflower actually voting for a larger 50 basis point reduction.

In the accompanying statement, policy makers acknowledged the long-term risks to the economy and said that higher credit costs warranted a quarter-point cut this month in order to sustain the future outlook of the economy.

However, the Bank of England raised its inflation forecast last week while the governor, Mervyn King, said that policy makers face a difficult balancing act this year amid suggestions that economic growth will stall to the slowest pace in 15-years.

In the aftermath of the minutes, the Pound declined heavily against the majors and failed to find any support despite news that UK factory prices had risen to the highest level in nine months.

The report from the Confederation of British Industry showed that factories are raising prices to recoup the rising cost of raw materials as the price of oil reached another record level this month.

Although the Bank of England have expressed concerns over slowing economic growth, the report yesterday shows that the Bank's scope to lower interest rates is limited because of rising inflationary pressures.

The recent price action surrounding the Euro suggests that the single currency may continue the upward momentum versus the Dollar while consolidating on the recent gains made against Sterling despite the ever shifting tone of the European Central Bank.

Earlier this month, the ECB President, Jean-Claude Trichet, finally acknowledged the downside risks to growth and that the Euro-zone economy will no longer be immune to a U.S led economic slowdown.

However, the governing council have adopted a staunchly hawkish stance in recent times as the annualised pace of inflation remains above the 3.0% barrier for the past three months.

That sentiment was echoed in a report in Germany yesterday as producer prices increased at the fastest annual pace in over a year. Record high food and energy costs are pushing inflation higher and that will prevent the ECB from cutting Euro-zone interest rates in the near-term.

The tentative price action surrounding the Dollar continued yesterday as the U.S currency failed to rally against all but two of the 16 most actively trading currencies despite stronger-than-expected reports on housing starts and consumer prices.

Nevertheless, the report from the Commerce Department did show that housing starts remained near the lowest level since 1991 in January and gives an indication that worst housing recession in 25-years will continue to hamper economic growth.

Builders started work on 1.012 million new homes in January, up 0.8% from the previous month while a plethora of unsold homes, rising foreclosures and falling prices may encourage the Federal Reserve to lower interest rates further over the coming months.

Elsewhere, a separate report on inflation showed that U.S consumer prices increased by more than anticipated in January as a jump in food and energy costs underscores the Fed's concerns over growth and may prevent another aggressive cut in rates.

Data Released 21st February

UK 09:30 Retail Sales (January)

U.S 13:30 Initial Jobless Claims (w/e 15th February)

U.S 15:00 Leading Indicators (January)

U.S 15:00 Philly Fed Business Survey (February)

written by Adam Solomon

The fallout from the Northern Rock fiasco continued to weigh on Sterling sentiment yesterday as news of the nationalisation of the lender seriously undermines the credibility of the UK government and the short-term implications on the market may drive the Pound even lower.

Nevertheless, the focus this morning will fall on the release of the minutes from the Bank of England's last policy meeting and the CBI industrial trends survey, which could potentially spark a Pound recovery.

The monetary policy committee lowered interest rates by a further 25 basis points in February but the tone and language used in the Bank's quarterly inflation report suggests that record high food and energy costs are putting upside pressure on price stability.

The governor of the BoE, Mervyn King, raised inflation forecasts this year and warned that the annualised pace of consumer prices may breach the 3.0% barrier over the coming months.

Although King also recognised the downside risks to economic growth, the chief concern among policy makers seems to be the upside risks to inflation and that may prevent the MPC from lowering interest rates too aggressively this year.

However, that sentiment was dashed by MPC member Kate Barker last night as she focused on the prospect of slower growth and proved that the nine-member committee is divided on the future outlook for the UK economy.

The renewed optimism surrounding the Euro saw the single currency make further gains against the Pound yesterday and also recoup some of the losses versus the Dollar in anticipation of the report on German producer prices this morning.

The staunchly hawkish stance of the European Central Bank can be attributed to the upside threat of inflation and the determination to see that risks to price stability do not materialise.

That sentiment may be validated this morning as the focus falls on the German producer price report, which is forecast to increase materially in January and keep the ECB from lowering interest rates in the short-term.

However, the recent price action surrounding the Euro suggests that the market is beginning to factor in a series of rate cuts this year as the tone and language used in the ECB press conference focuses on the downside risks to economic growth.

Following the lacklustre start to the week due to the U.S President's Day holiday, the increased level of volatility returned to the market yesterday as the Dollar paired losses against most major currencies except for the ailing Pound.

Despite the unexpected rise in the NAHB housing market index, a broader indication of the U.S property market is released this afternoon with housing starts expected to remain near the lowest level since 1991.

The worst housing recession in over 25-years is showing few signs of abating and is likely to hamper the economy for a third straight year.

Elsewhere, a separate report from the Labour Department may show that consumer price inflation rose 4.2% in the 12 months through January while core prices are forecast to increase just 0.2% from December.

Data Released 20th February

UK 09:30 PSNCR (January)

UK 09:30 BoE MPC Minutes (February Meeting)

UK 11:00 CBI Industrial Trends - Orders (February)

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

U.S 13:30 Housing Starts (January)

U.S 13:30 Real Earnings (January)

U.S 19:00 FOMC Meeting Minutes

written by Adam Solomon

The Pound declined against all but one of the 16 most actively traded currencies yesterday as the market reacted to news that the UK government plans to nationalise Northern Rock Plc and take control of the struggling lender amid the continued instability in the UK financial sector.

Gordon Brown's decision received widespread criticism yesterday and the Pound came under intense scrutiny as news followed that the government rejected two private sector bids to save the troubled lender.

The Bank of England was forced to provide emergency funding to Northern Rock plc in September as a sudden surge in credit costs led to the first run on a British Bank in over a century.

Tighter lending conditions after the collapse of the U.S subprime mortgage market has restrained consumer spending and led to an economic slowdown with the MPC lowering interest rates twice in just three months.

The Pound declined heavily against the Dollar and failed to find any support as a report from Rightmove plc showed that UK house prices rose for the first time in three months in February.

The price of a home in Britain climbed 3.2% following a 0.8% contraction the previous month and the report provides some optimism that the decade long housing boom has yet to end while further monetary easing may boost consumer sentiment.

Following a fundamental lack of Euro-zone economic data, the Euro fell marginally against the Dollar yesterday as ECB governing council member Liikanen said that growth in the region will fall below 2% this year due to weakening business and consumer sentiment.

The mixed messages coming out of the Central Bank confirms the market's belief that policy makers are beginning to focus on slowing economic growth rather than the upside risks to price stability.

A number of ECB officials have publicly expressed their concerns over the impact of the U.S subprime mortgage crisis while the ongoing turmoil in financial markets may convince policy makers to begin lowering Euro-zone interest rates.

The Euro has recorded it biggest weekly decline this year over the past week and that trend may continue today as ECB member Christian Noyer joined the chorus of voices focusing on weaker economic growth.

The recent price action surrounding the Dollar suggests that the U.S currency is not only susceptible to interest rate speculation with Fed Fund futures currently pricing in a 75% chance of a 50 basis point cut in March.

Nevertheless, the Dollar has made significant gains against both the Pound and the Euro and that trend may continue this week as food and energy costs are forecast to increase in January and drive the price of consumer goods higher.

The Federal Reserve have lowered U.S borrowing costs by 125 basis points over the past month but it seems that the resurgence in Dollar sentiment can be attributed to the market's belief that extensive monetary easing will eventually lead to the recovery in the economy.

Data Released 19th February

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

written by Adam Solomon

Following on from last week, the Pound recorded its first weekly advance against the Dollar since mid January as a hawkish quarterly inflation report and surprisingly positive economic data may prevent the Bank of England from cutting UK interest rates too aggressively over the coming months.

Following reports that consumer prices had risen to the highest level in seven months in January, the Central Bank released a statement saying that the annualised pace of inflation could breach the 3.0% barrier this year.

Recent reports have indicated that the UK economy is slowing but the obvious threat of inflation will be of particular concern to policy makers as they attempt to balance the risks to growth against record high food and energy costs.

The Pound rallied higher for five straight days against the Dollar but that move was cut short on Friday as a fundamental lack of UK economic data meant the upward move was driven almost entirely by Dollar weakness.

The Pound was also hampered by fears that UK banks will have to announce further write-downs this year after news broke that UBS will report losses upto $18 billion on its collateralized debt obligations. In addition, the UK currency has fallen significantly this morning as news broke of the nationalisation of Northern Rock plc.

The focus this week will fall on the release of the minutes from the Bank of England's last policy meeting and considering the tone of the Bank's quarterly inflation report, the decision to cut interest rates is expected to be a close call.

The Pound may find some support if the monetary policy committee was split in the decision to lower interest rates and that will provoke further speculation that the MPC will adopt a cautious approach on monetary policy for the remainder of the year.

The conflicting statements from a number of ECB officials drove the Euro higher against the Dollar last week with the single currency also making gains versus the Pound as the staunchly hawkish stance from some governing council members means an interest rate cut is far from certain.

The tone and language used in the ECB's monthly bulletin seems to suggest that policy makers are divided on the potential impact to Euro-zone economic growth but most agree that the economy will resist a U.S led economic slowdown.

The statement followed an earlier report that showed the flash estimate of Euro-zone economic growth actually slowed by less than anticipated in the three months December.

However, growth in the economy is slowing and the ECB will have to recognise the downside risks to growth while balancing the persistently high inflationary pressures. That sentiment was almost echoed in the European trade balance for the month of December where exports fell by the most in more than two years.

Global growth is slowing and therefore overseas demand is waning while the Euro's dramatic appreciation against the majors is likely to see orders decline further over the coming months.

A host of worsening economic reports and the deteriorating outlook of the U.S economy has seen the Dollar trade sharply lower against the majors and that trend looks set to continue as Bernanke's testimony to Congress reinforced expectations of further substantial U.S interest rate cuts to come.

In terms of economic data, the Dollar found little support as the Empire State index showed manufacturing in the New York region unexpectedly contracted for the first time in almost three years.

Concerns over a global economic slowdown has sapped demand from overseas while new orders and shipments declined by the most since May 2005. The worst slump in real estate for nearly 25-years combined with a softening labour market means that manufacturing output is likely to weaken further over the coming months and help push the broader economy into the realms of a recession.

Elsewhere, a separate regional survey on consumer confidence showed that sentiment had slumped to the lowest level since 1992 as the University of Michigan index fell to a reading of 69.6 from 78.4 in January.

Data Released 18th February

U.S President's Day Holiday

(No economic data released)

written by Adam Solomon

The Pound has rallied strongly against the majors over the past week, rising back towards 1.9700 versus the Dollar amid a plethora of positive economic reports and a surprisingly hawkish quarterly inflation report.

Consumer prices have risen to the highest level in seven months while the UK unemployment rate fell to the lowest level since 1975 and that has spurred optimism that growth in the economy will prevail in the face of slowing consumer spending and falling house prices.

The tone of the Bank of England's quarterly inflation report suggested that policy makers are very concerned with the upside risks to price stability and that will limit their scope in cutting interest rates this year.

The statement released by the governor of the BoE, Mervyn King, also indicated that the annualised pace of inflation could potentially breach the 3.0% barrier this year and as a result, the MPC will adopt a wait and see policy with regards the future outlook on UK interest rates.

The Bank of England face the same balancing act as the Federal Reserve did last year in juggling persistent inflationary concerns against slowing growth. However, when economic reports materially worsened and the crisis in credit deepened, the Fed was forced to shift their attention away from inflation and began cutting interest rates aggressively.

The Euro rebounded against the Dollar last night and has also made significant gains versus the Pound as speculation over further U.S interest rate cuts and hawkish commentary from ECB officials helped the single currency breach the 1.3400 level this morning.

The tone of the ECB's monthly bulletin suggests that policy makers are divided on the potential impact to economic growth from the turmoil surrounding financial markets. For the most past, the governing council largely agreed that the economy will continue to expand at a moderate pace and will resist a U.S led economic slowdown that threats a global recession.

The statement followed a stronger-than-expected report on Euro-zone GDP in the fourth quarter as growth slowed from 2.7% to 2.3% in the three months through December.

Amid a steady stream of disappointing data and further signs that the U.S economy is deteriorating, the Federal Reserve may be pressed into further monetary easing despite the unexpected upturn in U.S retail sales.

The overwhelming resilience of the Dollar has been called into question in recent weeks and the rebound in sentiment despite substantial interest rate cuts and worsening economic data can be attributed to hope that the Fed have acted decisively in protecting the future outlook of the economy.

However, the Dollar came under renewed pressure yesterday as the Fed chairman Ban Bernanke addressed Congress and warned about the downside risks to growth despite the recent recovery in consumer sentiment.

As a result, the Fed will lower U.S economic growth forecasts next week while speculation over another interest rate cut in February is likely to weigh on Dollar sentiment.

Data Released 15th February

U.S 13:30 Import / Export Prices (January)

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

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

U.S 14:15 Industrial Production (January)

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

written by Adam Solomon

The Pound declined against 12 of the 16 most actively traded currencies in early trade yesterday after a report from the Royal Institution of Chartered Surveyors showed that January was the worst for the British housing market since the months that followed the last recession in 1992.

Recent evidence has portrayed an un-denying slump in real estate and the report yesterday will provide further speculation that the decade long housing boom is coming to an abrupt end.

The gains in house prices fell significantly short of expectations and actually fell by the most since 1992 despite the Bank of England's decision to lower interest rates on two occasions in just three months.

In addition, the dwindling sentiment surrounding the UK economy is combined with tighter lending conditions that restricts first time buyers and threatens to shatter consumer confidence.

Nevertheless, the Pound actually finished the day higher against the Dollar as a separate quarterly report from the Bank of England raised UK inflation expectations to the highest level in five months after consumer prices accelerated to the fastest pace since July 2007.

Rising inflationary concerns will have an immediate impact on monetary policy and that may prevent the Bank of England from cutting interest rates too aggressively this year. The Pound also rallied higher yesterday following news from the Office of National Statistics who reported that UK unemployment fell for the 16th consecutive month and to the lowest level since 1975.

Robust growth in the labour market is likely to support UK economic growth this year as the impact from the U.S subprime mortgage crisis spreads across Europe.

The Euro has performed solidly against the Dollar over the past few trading sessions but a spate of weak economic data and strong U.S retail sales numbers saw the single currency consolidate under the 1.4600 level.

Industrial output in the Euro-zone was forecast to accelerate in the month of December but a smaller rebound in German and French production gave a strong indication that manufacturing through the whole of Europe could falter.

In addition, the Euro has found little support this morning as preliminary estimates for GDP in Europe's two largest economies showed that growth cooled in the three months through December.

Reports in Germany showed that gross domestic product rose just 0.3% from the third quarter and there are real signs that the Euro-zone economy is losing momentum.

The positive sentiment surrounding the Dollar continued yesterday as the U.S currency clung on to the recent gains made against the majors as an unexpected rise in consumer spending quashed concerns that the U.S economy stands on the precipice of a recession.

The hotly anticipated report from the Commerce Department showed that U.S retail sales actually rose 0.3% in January and the Dollar may continue to make gains amid speculation that the Fed have acted pro-actively in protecting the future outlook for the economy.

Consumer spending accounts for almost 70% of gross domestic product and will probably decline over the coming months, prompting the Federal Reserve to continue monetary easing.

Nevertheless, the unexpected rise in retail sales for January will diminish recession anxieties for the time being while the report also coincides with comments from a number of Fed officials.

Data Released 14th February

EU 08:00 ECB Monthly Bulletin Published (December)

EU 10:00 GDP Flash (Q4)

U.S 13:30 Jobless Claims (w/e 8th February)

U.S 15:00 Trade Balance (December)

written by Adam Solomon

The Pound has rallied strongly against the majors this week as UK producer price inflation increased at the fastest pace in 16-years in the month of January and provided some optimism that the Bank of England will need to focus on inflation and adopt a neutral stance on monetary policy.

However, the Pound struggled to consolidate on the recent gains made against the Dollar yesterday as the broader CPI report showed that the annual inflation rate was lower actually lower than forecast over the same period.

Consumer prices increased just 2.2% from this stage in 2007, compared with 2.1% in December and it seems that rising producer costs have yet to feed through to the consumer.

The Pound subsequently snapped two days of gains against the Dollar and promptly fell back under the 1.9500 level amid speculation that the Bank of England will continue monetary easing with the next likely cut in April.

Despite consumer prices increasing by less than anticipated, the report also highlighted that the rate of inflation has hit the highest level in seven months amid soaring food and energy costs.

As a result, the Bank of England are unlikely to adopt the same aggressive policy as the U.S and will tentatively reduce borrowing costs as growth in the economy cools. Following the recent conflicting reports on inflation, the Bank of England quarterly report will be of particular interest this morning and considering the MPC cut interest rates in February, the Pound may struggle to make any gains.

The pressure on the European Central Bank to begin monetary easing is growing but the Euro received some much needed support yesterday as the ZEW survey for investor confidence showed an unexpected upswing in sentiment this month.

The unrelenting resilience among German investors saw the index rebound from a 15-year record low in February and propelled the Euro for the best intraday performance of the month.

Given the slightly dovish tone of the ECB press conference last week, pressure is growing on the Central Bank to recognise the imminent threats to economic growth and ignore growing inflationary pressures that threaten to spiral out of control.

However, the German Finance Minister Peer Steinbrueck refuted suggestions that the ECB should adopt a neutral policy and claimed that price stability should be greater concern that the threat of a U.S led economic slowdown.

The renewed appetite for the Dollar continued yesterday as the U.S currency clung to the majority of the recent gains made against the Euro as the rate cuts by the Federal Reserve combined with the fiscal stimulus package announced by the government will prevent the U.S economy from slipping into a recession.

The recent price action surrounding the Dollar has led to speculation that the future outlook for the economy remains positive as the Fed act aggressively and decisively in cut interest rates 125 basis point in just nine days.

However, the outcome of the economy and short-term outlook for the Dollar will largely depend on the tone of U.S retail sales report this afternoon. Consumer spending accounts for almost 70% of U.S gross domestic product and December saw the first contraction in sales since June.

The Dollar may struggle to find any support as January sales figures are also expected to drop and that would incur the first back-to-back decline in sales since December 2001.

Data Released 13th February

UK 09:30 BoE Inflation Report

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

UK 09:30 Claimant Count Unemployment (January)

EU 10:00 Industrial Production (December)

U.S 13:30 Retail Sales (January)

U.S 15:00 Business Inventories (December)

GER 10:00 ZEW Index (February)

written by Adam Solomon

The Pound reversed much of its earlier losses against the Dollar yesterday and bounced back above 1.3400 versus the Euro as a government report showed that UK factories raised prices at the fastest annual pace since 1991.

Producer prices for goods ranging from textiles to chemicals rose an alarming 5.7% from this stage in 2007 as gains in raw materials jumped to a record level, giving the Bank of England less scope to reduce interest rates.

The cost of raw materials increased 19.1% year-on-year in January, which is the most since records began in 1986 while the report will only serve to feed concerns over the growing threat of inflation.

The Pound rose 0.5% against the Dollar in the aftermath of the report as policy makers attempt to balance the risks to economic growth against rising inflationary fears as factories charge higher prices in order to offset record high food and energy costs.

The report yesterday coincides with news that UK manufacturing output prices rose 1% from December, the most in three years, while consumer prices may have also risen over the same period.

The report from the Office of National Statistics represents the broadest measure of inflation with prices forecast to climb to an annual rate of 2.3%, up from 2.1% in December.

The European Central Bank Chairman, Jean-Claude Trichet, finally acknowledged that economic growth is susceptible to a U.S led global recession and will continue to slow over the coming months, leading to an inevitable cut in interest rates.

The tone of his statement indicates that the resilience of the European economy is showing signs of cracking with business and consumer sentiment plummeting on an almost monthly basis.

The Euro has fallen 2% against the Dollar over the past week and consolidated above 1.3400 versus the Pound last night while the single currency may struggle to recover this morning as German investor confidence probably fell to the lowest level in 15-years.

The ZEW index of investor and analyst expectations is forecast to drop to a reading of minus 45 in February as the recent slump in stock markets increased pessimism about the economic outlook.

The surprising resilience of the Dollar continues to be the dominate theme in the market as the U.S currency consolidated on the recent gains made against both the Euro and the Pound despite a barrage of weakening economic data.

The Federal Reserve have lowered U.S interest rates by 125 basis points since the beginning of the year and Fed fund futures have already priced another three-quarter percentage point reduction over the coming months.

The market has anticipated and priced in every one of these moves and for that reason, a host of exceptionally poor economic reports have failed to drive the Dollar lower. In addition, the renewed appetite for risk aversion also served to renew sentiment in the U.S currency but a number of cautious comments from G7 finance ministers at the weekend seemed to focus on the persistent downside risks to global growth.

Nevertheless, FOMC member and Federal Reserve Bank of St Louis President William Poole echoed a recent hawkish statement from Janet Yallen in saying that the U.S will probably avoid a recession as the Fed's current monetary policy is appropriate for the slowing economy.

Data Released 12th February

UK 00:01 BRC Retail Sales (January)

UK 09:30 Consumer Price Index (January)

- Retail Price Index

GER 10:00 ZEW Index (February)

written by Adam Solomon

Following on from last week, the Pound declined heavily versus the Dollar on Thursday and that trend continued into Friday as the UK currency paired losses with most of the 16 most actively traded currencies following the Bank of England's decision to lower interest rates for the second time in three months.

The nine-member monetary policy committee elected to lower the benchmark lending rate to 5.25% in response to slowing consumer spending and falling house prices. As a result, the Pound promptly plunged over 1% against the Dollar in the aftermath of the announcement despite the Federal Reserve lowering rates by the fastest pace since 1990 just a week earlier.

In terms of economic data, the Pound failed to find any support as the National Institute of Economic and Social Research said that UK economic growth expanded at the weakest pace since 2005 in the three months through January.

The economy grew at just 0.5%, compared with 0.6% in the fourth quarter and the report suggests that an economic slowdown in deepening, following the worst slump in house prices for over a decade.

The Pound is likely to struggle against the majors this week as a barrage of weakening economic data gives the Bank of England scope to continue monetary easing, with the next likely cut in April.

The renewed sentiment surrounding the Dollar continued on Friday as the U.S currency remained resilient in the face of a barrage of weak economic data to climb against the Pound and consolidate on the 2.2% gain on the Euro.

On the whole, U.S economic data has pointed to a further softening in the housing market while consumer spending slows and service sector growth contracts.

Nevertheless, the aggressive actions of the FOMC last month have been interpreted as positive for the future outlook of the U.S economy while the short-term Dollar strength may continue as the President of the San Francisco Bank, Janet Yellen, said that the economy will avoid a recession.

The weakening sentiment surrounding the European economy lead to the Euro recording the biggest weekly decline against the Dollar in nearly two years while also posting losses versus the Pound as the ECB president, Jean-Claude Trichet, signalled that the Central Bank is not adverse to cutting interest rates.

Recent hawkish commentary from a number of ECB officials has been in stark contrast to the tone of recent economic reports, which has heightened concerns that the Euro-zone economy is susceptible to a U.S recession.

In the aftermath of the ECB press conference, the Euro fell against 14 of the 16 most actively traded currencies and there is potential for further downside movement this week with the focus falling on the initial estimates for Euro-zone economic growth in the fourth quarter.

The Central Bank have been far more concerned with rising inflationary pressures than the potential for an economic slowdown but the report this week may invoke speculation of an impending rate cut in the months ahead.

Data Released 11th February

UK 09:30 DCLG House Prices (December)

UK 09:30 Producer Price Index (January)

UK 09:30 Trade Balance (December)

written by Adam Solomon

The heightened sense of speculation surrounding the Bank of England interest rate announcement reached fever pitch yesterday as the UK currency posted further losses against the majors in anticipation of the second rate cut in just three months.

The nine-member Monetary Policy Committee, led by the governor Mervyn King, elected to reduce the benchmark lending rate to 5.25% in response to slowing consumer spending and the steepest decline in house prices for over a decade.

The MPC stopped short of adopting the same aggressive policy as the Federal Reserve and decided to lower rates by just 25 basis points. The move had been factored into the market for the past month and in the accompanying statement policy makers said that they need to balance risks to economic growth against the threat of rising inflationary pressures.

The tone and language used in the statement seems to indicate that the Bank of England will continue cutting interest rates this year while how fast and how much will depend predominantly on inflation expectations.

The Bank also acknowledged that rocketing food and energy prices are expected to rise "quite sharply" this year but a slowing economy and falling interest rates are likely to "return inflation to target in the medium term".

Nevertheless, the UK's benchmark rate is still the highest among the Group of Seven nations while the Pound fell 0.3% against the Dollar in the aftermath of the announcement.

Elsewhere, the economic data released prior to the rate announcement did little to boost Sterling sentiment as UK manufacturing unexpectedly fell for a second consecutive month in December.

The renewed appetite for the Dollar gathered momentum yesterday as the U.S currency erased its losses for the year against the Euro while also rising 1% in value versus the ailing Pound.

As the ECB admitted that Europe won't escape the fallout from the U.S economic slowdown, speculation intensified that the Fed's decision to lower borrowing costs on two occasions in January will put the U.S economy on course to recover faster than the Euro-zone.

However, a number of recent economic reports points to further deterioration in services and consumer spending while the number of Americans filing unemployment claims fell less than forecast last week.

The Euro declined for a fourth straight day against the Dollar and also registered sharp losses versus the Pound after the Chairman of the European Central Bank, Jean-Claude Trichet, signalled that policy makers may be forced into cutting interest rates as economic growth cools.

Following the ECB's decision to leave interest rates unchanged at 4.0% this month, the Euro erased the earlier gains made against the Dollar and is poised to record the biggest weekly loss in 18 months.

The staunchly hawkish stance of the Central Bank has been the foundation for the Euro's appreciation towards fresh record highs against both the Pound and the Dollar but Trichet's comments yesterday may pave the way for the first cut in nearly five years.

Just over a week ago the ECB had been talking up the resilience of the Euro-zone economy in the face of U.S recession and the need to prevent inflation from spiralling out of control.

While global stock markets tumbled Trichet was calling for calm and stressed on many occasions that Central Bank's should prevent second round effects and maintain price stability during times of turbulence.

Data Released 8th February

GER 11:00 Industrial Production (Decmeber)

U.S 15:00 Wholesale Inventories (Decmeber)

written by Adam Solomon

The Pound continued the downward momentum against the Dollar yesterday, dropping to a low of 1.9556 by the close of trading last night while also recording losses versus the Euro after an industry report showed that UK consumer confidence had fallen to the lowest level in at least three years.

Despite the unexpected growth in UK service industries over the same period, an index of consumer sentiment fell to the lowest level since 2004 in January as slowing economic growth, rising prices and falling stocks weigh on confidence and Briton's ability to spend.

The report from the Nationwide Building Society has declined by 4 points since December as UK stocks dropped 9% in January while the decade long housing boom appears to be coming to an end.

In the aftermath of the report, the Pound declined against all but three of the 16 most actively traded currencies amid fears that the economic slowdown is deepening while a plunge in global stocks is likely to hamper Sterling as investors move away from high-yielding assets.

The focus today will inevitably fall on the hotly anticipated Bank of England interest rate announcement this lunchtime where the MPC are expected to lower rates by 25 basis points. Nevertheless, the outcome of the two day meeting has been largely factored into the market and the hype surrounding a UK interest rate cut may see the Pound actually make some gains against the majors.

The unrelenting strength of the European economy has been called into question this week as the tone of a number of economic reports points to fresh downside risks to growth with service industries accelerating at the slowest pace in four years.

The Euro continued to decline against the Dollar and also remained largely unchanged versus the Pound as we build up to the ECB interest rate decision and accompanying press conference.

Nevertheless, the Euro has found some support recently as a host of members from the ECB's governing council continue to talk up the resiliance of the economy in the face of U.S led global recession.

The hawkish commentary from the chairman of Central Bank, Jean-Claude Trichet, suggests that the ECB will leave rates unchanged in February but the tone and language used in the press conference will be heavily scrutinized.

If Trichet fails to acknowledge the weakening sentiment in the Euro-zone economy, we can expect the Euro to make widespread gains against the majors as policy makers retain a hawkish stance on inflation.

The surprising resilience of the Dollar has been the main theme over the past week and that trend continued yesterday as the U.S currency made further gains versus the Pound as a report on worker productivity grew by more than forecast in the fourth quarter.

Productivity, which measures employee efficiency, rose to annualised rate of 1.9% after a 6% increase in the third quarter while a measure of labour costs rose by less than forecast.

The dire outlook for the U.S economy has been emphasised by the tone of recent economic data but the upside movement of the Dollar can be attributed to the market's interpretation of the Fed's actions last month and the assumption that policy makers have acted clinically to avoid a U.S recession.

Therefore, the data released in the U.S is likely to have little impact on the market with pending home sales expected to fall a further 1% in December and compound the housing market to the worst performance since 1990.

Data Released 7th February

U.K 09:30 Industrial Production

- Manufacturing Output

UK 12:30 BoE Rate Announcement

GER 11:00 Industrial Orders (December)

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 2nd February)

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

U.S 20:00 Consumer Credit (December)

written by Adam Solomon

The speculation surrounding the Bank of England interest rate announcement has seen the Pound decline against most of the major currencies in the last week and that trend continued yesterday as the UK currency sank below 1.9700 versus the Dollar following a report on UK house prices.

According to a report from HBOS Plc, the average cost of a home in Britain remained unchanged at £197,244 in January as rising credit costs and fewer mortgage applications dampened sentiment.

Prices actually fell 1% in the last quarter and rose just 4.5% from this stage in 2007 as UK lenders impose stricter lending conditions as they attempt to contain the losses stemming from the collapse of the U.S subprime mortgage market.

Nevertheless, the Pound actually made robust gains against the Euro yesterday as a separate report from the Chartered Institute of Purchasing and Supply showed that growth in UK service industries unexpectedly accelerated for a second month in a row.

The index actually rose to a reading of 52.5 from 53.4 in December, which suggests that the monetary policy committee have limited scope to cut interest rates as the projected slowdown in services has yet to appear.

The recent price action surrounding the Euro suggests that the single currency is struggling to hang on to the recent gains made against the majors as a host of negative economic reports suggests the economy is beginning to feel the threat of U.S led global recession.

The Euro declined heavily against both the Pound and the Dollar yesterday as growth in European service industries accelerated at the slowest pace in over four years in January.

The PMI index dropped to a reading of 50.6, the lowest level since July 2003, from 53.1 the previous month with a figure above 50 indicating expansion in the sector. The slowdown in growth challenges the staunchly hawkish stance of the ECB's governing council, who feel confident that the Euro-zone is strong enough to cope with a cooling U.S economy.

Therefore, it will interesting to see whether the chairman, Jean-Claude Trichet, will recognise the very real threat to economic expansion on Thursday but the Euro may find support if the tone of the statement focuses on inflation.

The broad based Dollar strength surprised many investors yesterday as the U.S currency rallied against both the Pound and the Euro despite reports that growth in U.S services industries unexpectedly contracted by the most since the 2001 recession.

The ISM non-manufacturing index plummeted to a reading of 41.9 from 54.4 the previous month as the housing slump gathered momentum and spending froze. U.S services reflect growth in almost 90% of the U.S economy and this stunning slump will heighten concerns that the U.S in the midst of a recession that threatens the pace of the global economy.

Amid the political stalemate surrounding the hotly contested democratic seat, Barrack Obama and Hilary Clinton will extend their struggle for the presidential candidacy into next month while the Dollar may struggle to consolidate on the recent gains made in the face of yet more negative economic data.

Nevertheless, the recent positive sentiment surrounding the U.S currency can be derived from the market's interpretation that the Fed have acted to ensure the future outlook of growth remains positive.

Data Released 6th February

U.S 13:30 Unit Labour Costs (Q4)

- Productivity

written by Adam Solomon

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