Daily Insight

The Pound lost ground against the Dollar yesterday following a distinct lack of UK economic data, ending an 11-day winning streak, which has seen sterling trade at the highest level against the Dollar since September 1992. The recent positive sentiment surrounding the Pound can be attributed to increased speculation that the Bank of England will continue raising UK interest rates next year. Therefore, Gordon Brown's pre-budget report will take on added significance tomorrow as he is expected to raise his forecasts for UK economic growth to 2.6%. The Pound may come under some pressure this morning as a report from the British Retail Consortium is expected to show that retail sales increased at the slowest pace in nine month in November. It seems increasingly likely that rising unemployment, a record consumer debt and higher interest rates will have a damaging effect on consumer spending next year and that will undoubtedly influence monetary policy in 2007. Elsewhere, a separate report on the UK service sector is expected to show a modest decline in the month of November, although a reading above 50 indicates growth.

The Euro rose to a fresh 20-month high against the Dollar yesterday despite a worse-than-expected report on Euro-zone producer price inflation, which came in below forecast in October and suggests that inflationary pressures may continue to moderate in the New Year. The ECB are still widely expected to raise Euro-zone interest rates this week but the quarterly forecast that follows may show inflation below the Central Bank's 2.0% target, which would correlate with the recent softening of Euro-zone price data. However, the Euro has continued to rise and thus far, the ECB is seemingly unconcerned with the Euros dramatic appreciation against the Dollar despite the damaging impact on European exports. In terms of economic data, the Euro may hold firm against the majors this morning following a report on Euro-zone service industries, which is widely expected to maintain the pace of growth in November. While elsewhere, a separate report on Retail Sales may show a rise of 0.3% from September as consumers are encouraged to step up spending before the German value added tax increase next year.

The Dollar ended an 11-day losing streak against the Pound yesterday and came back from a fresh 20-month low versus the Euro despite a less than convincing report on the U.S housing market. Pending home sales fell by more than expected in October, which suggests that the dramatic housing slump this year has not yet reached its peak, putting further pressure on the Federal Reserve to begin cutting interest rates next year. However, the Dollar may come under further pressure this afternoon as a report from the Institute of Supply and Management may show a further softening of U.S service industries with the index falling to a reading of 56.0 in November from 57.1 the previous month. In addition, a report on Nonfarm productivity in the third quarter is expected to show a modest rise in the revised estimate although unit labour costs grew at a more slower pace than previously anticipated, which eases concerns that rising wages will fuel inflation.

Data Released 5th December

UK 09:30 CIPS Services Survey (November)
UK 11:00 BRC Retail Sales Survey (November)

EU 10:00 Retail Sales (October)
EU 09:00 PMI Services (November)

U.S 15:00 Productivity (Q3 Revised)
- Unit Labour Costs
U.S 15:00 ISM (Non-Manufacturing) (November)
U.S 15:00 Factory Goods Orders (October)

written by Adam Solomon