NEWS / Foreign Exchange

UK CPI Exceeds Expectations

- The European indices are currently trading lower in the session led lower after Deutsche Post reported relatively poor earnings for the fourth-quarter.

- European government bonds are trading just below the unchanged level in today??™s session, while gilts are trading lower in the UK after the release of stronger than expected CPI and RPI figures.

- As expected German producer prices rose to 0.3% m/m, and fell for the ninth consecutive month to a 26-month low of 2.8% y/y. The m/m rise in Germany producer prices was led by an increase in energy prices.

- Italian industrial sales and industrial orders, which are notoriously volatile, all fell well below estimates, with the exception of y/y industrial sales, which exceeded estimates of 9.9% at 11.1%.

- Swiss producer and import prices were stronger than expected in February led by higher metals costs. Swiss producer and import prices rose to their highest m/m level in six months at 0.3%, while remaining unchanged from January at 2.2% y/y.

Zimmerman, the Chief of the German DIW research institute, said overnight that he sees the ECB raising rates to 4.0% in 2007. Zimmerman forecasted German GDP growth of 2.0% in 2007.

- CPI and RPI data exceeded expectations in the UK, with the exception of core CPI, which was in line with estimates. CPI rose to 0.4% m/m and 2.8% y/y, while RPI rose to 0.7% m/m and 4.6% y/y. RPI y/y was the highest since December of 1991. According to analysts, the rise in CPI was led by an increase in transport prices stemming partly from an increase in air passenger duty. Analysts also pointed out services inflation as one of the catalysts behind the rise in CPI, noting that goods inflation remained relatively stable.

- The ECB??™s Liikanen reiterated much of the recent ECB rhetoric overnight. Liikanen said that interest rates are moderate, and that monetary policy is on the accommodative side. Liikanen said that inflation risks remain on the upside, and pointed out wage developments as a key inflation risk.