Daily Insight

Following on from last week, the Dollar continued to decline against the majors, falling to the lowest level in 14-years against the Pound and a fresh 20-month low versus the Euro following a band of weak economic reports and increased speculation that the Federal Reserve will begin cutting U.S interest rates in the fourth quarter of next year. The negative sentiment surrounding the Dollar increased further on Friday as the Institute of Supply and Management released their monthly report on U.S manufacturing, which unexpectedly shrank in November for the first time in three years. The focus this week in terms of economic data will be the monthly U.S job report this Friday and the consensus forecast is for the unemployment rate to increase to 4.5%, which is likely to fuel further dollar weakness.

The Euro has been making robust gains against the Dollar and has been trading in a very tight range against the Pound ahead of the ECB interest rate announcement on Thursday this week. It is widely anticipated that the Central Bank will raise Euro-zone interest rates for the sixth time this year in order to cool inflation after the fastest economic growth in nearly six years. The chairman of the ECB, Jean-Claude Trichet, along with several other policy makers have publicly announced their stance with regards future monetary policy and it seems increasingly likely that rates will continue to rise in the New Year. In terms of economic data, the Euro may receive a boost this morning from the producer price index, which is expected to show a modest increase on the month although the core rate of inflation may ease back towards 4.1%.

The Pound has traded at the highest level against the Dollar since 'Black Wednesday' back in 1992 over the past week and that trend is set to continue ahead of Gordon Brown's pre-budget report on Wednesday. The Chancellor is widely expected to raise the UK growth forecast to 2.6% and that will in turn lead to speculation that the Bank of England will have room to raise UK interest rates in the New Year. Elsewhere, the Monetary Policy Committee within the BoE meet this week to announce their latest stance on interest rates and following the projected rise in rates last month, we expect a 'no change' in the announcement for December.

Data Released 4th December

EU 10:00 Producer Price Index (October)

U.S 15:00 Pending Home Sales (October)

written by Adam Solomon