Market News

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

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

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

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

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

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

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

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

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

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

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

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

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

Data Released 11th March

UK 09:30 DCLG House Prices (January)

GER 10:00 ZEW Index (March)

U.S 12:30 Trade Balance (January)

written by Adam Solomon

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

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

Data Released 10th March

UK 09:30 Producer Price Index (February)

U.K 09:30 Industrial Production (January)

U.S 14:00 Wholesale Inventories (January)