Market News

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 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 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