Daily Insight

The Pound made significant gains against the Dollar yesterday, firming 0.3% by the close of trading last night in the build up to the release of the Consumer Price Index this morning, which is expected to show UK inflation running at the highest level in nine years for the month of November. Consumer prices are widely expected to have increased by 2.6% year-on-year last month, which is the most since the index was introduced in 1997 and shows heightened inflationary concerns despite the Bank of England's decision to lift interest rates to 5.0% this year. UK economic growth has accelerated at the fastest pace in two years in 2006 and combined with rising utility bills and the sustained growth in UK house prices, it seems evermore likely that the Bank of England will continue raising rates over the coming months. The Pound also received a boost yesterday as producer output prices remained firm in the index for November after falling for two consecutive months and it seems the Pound's dramatic appreciation against the Dollar this year is obviously weighing heavily on UK exports.

The Euro made further gains against the majors yesterday, increasing 0.4% against the Dollar and a modest 0.1% versus the Pound despite a distinct lack of economic data released in the Euro-zone. The single currency may also receive a boost this morning following the release of the ZEW survey for investor confidence, which is expected to recover from a 13-year low in November, suggesting that the German economy will continue to show signs of growth despite the introduction of the impending sales-tax increase next year. The ZEW index would correlate with a separate report on German business confidence over the same period, which unexpectedly rose to a 15-year high in November following a significant rise in exports.

Following the surprisingly positive report on U.S nonfarm payrolls last week, the Dollar has been making steady gains against Sterling but comments from the former Federal Reserve chairman, Alan Greenspan, sparked renewed dollar selling yesterday as he stated that weakness in the U.S currency could extend for a number of years. In addition, it became clear that several oil producing nations have cut their dollar exposure to the lowest level in two years in 2006 following the release of the quarterly review from the Bank for International Settlements. The focus today will fall heavily on the FOMC rate announcement this evening where Fed policy makers are widely expected to leave U.S interest rates unchanged in December. However, the market will be paying closer attention to the accompanying statement where the chairman, Ben Bernanke, may signal that the U.S economy hasn't slowed to the extent, which would diminish the risk of higher inflation. Elsewhere, the Dollar may receive a further boost as a report on the U.S trade balance is expected to show that the deficit in goods and services actually narrowed in October, which correlates with a significant drop in oil prices over the same period.

Data Released 12th December

UK 09:30 Consumer Price Index (November)
- RPI

UK 11:00 CBI Industrial Trends Survey (December)

GER 10:00 ZEW Expectations Balance (December)

U.S 13:30 Trade Balance (October)
U.S 19:00 Treasury Budget (November)
U.S 19:15 FOMC Rate Decision

written by Adam Solomon