Daily Insight

The Dollar came under further pressure against the majors last night, falling 0.6% versus the Pound after the Federal Reserve elected to hold U.S interest rates at 5.25% for the fourth straight month as policy makers voted 10-1 in favour of no change. Although the outcome of the FOMC meeting was largely factored into the market, the Dollar declined after the release of the accompanying statement, which seemed to suggest that an interest rate cut would be likely next year. The Fed chairman, Ben Bernanke, stated that economic activity had been "mixed" in 2006 and he described the housing slump as "substantial", which will only fuel speculation that the Open Market Committee will begin reducing interest rates next year in the face of slowing economy and reduced inflationary pressures. Earlier in the trading session, the Dollar made modest gains against both Sterling and the Euro following a report on the U.S trade balance, which showed that the deficit in goods and services actually narrowed by the most in almost five years in October. The gap in trade shrank 8.4% to $58.9 billion as the price of oil dropped and faster economic growth abroad helped propel U.S exports. The Dollar may receive a boost this afternoon following the report on U.S retail sales, which is expected to rise for the first time in three months in November.

The Euro declined against Sterling yesterday but rose 0.2% versus the Euro following a better-than-expected report on German investor confidence, which surprisingly bounced back in December from a 13-year low the previous month. The ZEW centre for Economic Research released their monthly index, which unexpectedly rose to a reading of minus 19 this month as increased investment and a significant drop in unemployment boosted sentiment in Europe's largest economy. The report will only fuel speculation that the European Central Bank has the scope to continue raising interest rates as the German economy still has room to expand despite the introduction of the value added tax increase at the start of 2007.

The Pound made significant gains against the majors yesterday, rising 0.4% against the Euro and a further 0.5% against the Dollar following a report on the consumer price index, which showed that UK inflation has accelerated at the fastest annual rate since the series began in January 1997. Consumer prices increased 2.7% from this stage last year, which has been well above the government's 2.0% target for the past seven months and it seems evermore likely that the Bank of England will continue to raise interest rates in the first quarter of next year. UK economic growth has accelerated at the fastest pace in two years in 2006 and combined with a substantial rise in utility bills, which have increased 11.1% since November last year, speculation will continue to intensify that the BoE will raise borrowing costs beyond the current five-year high. The Pound may receive a further boost this morning after another gauge of UK inflation may show that average hourly earnings increased to 4.0% in the 3 months to October while a separate report may show UK unemployment unchanged in November.

Data Released 13th December

UK 09:30 Average Hourly Earnings (3 months to October)
UK 09:30 Claimant Count / Unemployment Rate (November)

U.S 13:30 Retail Sales (November)
U.S 15:00 Business Inventories (October)

written by Adam Solomon