The Pound unexpectedly declined against the Euro yesterday, dropping 0.7% to trade well under 1.4900 by the close last night despite the Bank of England's decision to lift interest rates by a further quarter-point to 5.0% with the aim of containing inflation and avoiding demands for higher wages. The MPC and the governor of the BoE, Mervyn King, raised their benchmark lending rate to a 5-year high yesterday but the accompanying statement left no clues as to future policy and whether monetary tightening will continue into 2007. The statement struck a fairly neutral tone with regards a further rise in rates and as a result, the Pound declined against the Euro as the tone of the statement left the outlook on UK interest rates uncertain. In terms of economic data, The Pound received a boost as a report on the UK global trade balance showed that the deficit in goods and services actually narrowed for the second consecutive month in September with the shortfall coming in at £6.6 Billion.

The positive sentiment surrounding the Euro has been gathering momentum this week following a host of positive economic data, which has only reiterated comments from a number of ECB members calling for a further rise in European interest rates next month and into the new year. The Euro made significant gains against the Pound yesterday and firmed up an additional 0.7% against the Dollar to trade at a two-month high following a particularly hawkish rhetoric from an executive board member within the ECB who stated that leaving interest rates at 3.25% would be 'too accommodating' and the Central Bank must remain 'vigilant' to contain inflation. The speech mirrored comments from the chairman, Jean-Claude Trichet, last week and it seems increasingly likely that the Central Bank will lift rates to 3.50% by the year-end and therefore, the Euro may make further gains against Sterling over the coming month.

The Dollar came under increased pressure against the majors yesterday despite a host of positive economic data including a report on the U.S trade balance, which showed that the ever-widening deficit in goods and services shrank by the most in over two years for the month of September as the value of oil plummeted by up to 25% since mid-July. The shortfall in trade was smaller than expected at $64.3 billion after an all time high set the previous month of $69 Billion and with energy prices dropping significantly and the continued weakness of the dollar, U.S exports should rise over the coming months. Elsewhere, a separate report showed that U.S consumer confidence remained close to the highest level in 15 months for November as cheaper fuel prices and an expanding labour market encouraged consumers onto the highstreet. Initially, the Dollar made some gains against the Pound, briefly dropping under 1.9000 before the announcement that the Democrats had clinched majorities in both houses of the U.S Congress for the first time since 1994 after winning the Senate seat in Virginia, condemning George W Bush as a "lame duck President' for the remainder of his term in office. The political tension surrounding the dramatic return to power on Capitol Hill sent the Dollar crashing to a new yearly low against the Pound as we trade above 1.9100.

Data Released 10th November

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written by Adam Solomon