Daily Insight

The Pound advanced to the highest level this year against the Dollar last week following a combination of weak U.S economic data and the Bank of England's decision to lift UK interest rates to 5.0% in an attempt to rein in inflation and maintain price stability. There is a plethora of significant data released this week in both the States and in Europe, which should provide some direction with regards future monetary policy. The focus will fall on the BoE quarterly inflation report on Wednesday, which is expected to give an insight into the outlook for UK interest rates and it will be interesting to see whether the scale of monetary tightening since August has been sufficient to keep inflationary pressures relatively under control. The recent positive sentiment surrounding the Pound may continue with the data released this morning as the monthly producer price index is expected to show modest growth in output prices for the month of October with the annual rate rising to 1.9%.

The Euro made some gains against Sterling last week after the BoE left the outlook for UK interest rates unclear coming into year-end while the market was hoping for a good indication of further monetary tightening in the first quarter of 2007. In addition, a number of ECB board members and policy makers have publicly called for a more aggressive stance towards a further rise in Euro-zone interest rates after the chairman, Jean-Claude Trichet gave a strong indication that rates are set to rise for the fifth time this year in the first week of December. In terms of economic data, the Euro may come under pressure from a report on the headline measure of European inflation, which is expected to remain unchanged at 1.6% while the core estimate may drop to 1.4%, which is still well under the Central Bank's 2.0% target suggests that growth in the economy may begin to moderate.

The Dollar declined against the majors last week, falling to two-month low against the Euro despite a host of positive economic reports as the shortfall in trade actually narrowed by more than anticipated in September and U.S consumer confidence remained close to the highest level in 15 months. Nevertheless, the Dollar continued to come under increased pressure as the political tension surrounding the U.S mid-term elections culminated in the Democrats clinching majority seats in both houses for the first time since 1994. There is a packed calendar of U.S data released this week including the minutes from the Federal Reserve's last interest announcement where policy makers elected to hold rates at 5.25%. Elsewhere, the Dollar may continue to struggle amid a mass of economic reports with the focus largely falling on U.S retail sales, which is expected to ease a further 0.3% while elsewhere, U.S consumer price inflation is expected to remain relatively unchanged at 2.9% excluding the volatile food and energy.
Data Released 13th Nov

UK 09:30 Producer Price Index (October)
- Output

UK 09:30 DCLG House Prices (September)

written by Adam Solomon