Daily Insight

Following in from last week, the dramatic and unrelenting decline of the Dollar saw the U.S currency plummet to a fresh 26-year low against the Pound while also testing record lows at 1.4500 versus the Euro following the Fed's decision to lower interest rates to 4.50%.

Although the outcome of the FOMC meeting was largely factored into the market, the accompanying statement didn't provide any clear insight into future policy as policy makers chose to acknowledge that rising commodity prices are having a profound impact on inflation.

Over the past week, the price of oil has surged to the highest level on record as escalating tensions between the U.S and Iran sent prices hurtling towards $100 a barrel.

The Dollar sank to a fresh multi-decade low against the Pound on Friday despite reports that the economy had added almost twice as many jobs as expected in October.

Non Farm payrolls increased by 166,000 jobs after an increase of 96,000 in September as the resilience in the labour market is helping steer the economy away from recession amid a worsening housing slump and record oil prices.

The recent turmoil surrounding financial markets may intensify this week and that could provide some support to the ailing U.S currency as growing concerns over a second credit crunch may see traders return to the Dollar.

The diverging interest rate expectations between Europe and the U.S has sent the Euro to the highest level on record against the Dollar as consumer price inflation in the Euro-zone is accelerating at the fastest pace in two years.

Despite softer-than-expected reports on manufacturing growth in Germany and Italy, a staunchly hawkish statement from the French Secretary of State sent the Euro higher against both the Pound and the Dollar on Friday.

The recent appreciation of the Euro has drawn vocal opposition, particularly from the French, but the Secretary of State maintained that they are resolving their arguments with the ECB because a strong currency is helping keep prices under control.

The focus this week will inevitably fall on the ECB interest rate announcement on Thursday where the squabbling governing council will leave borrowing costs unchanged at 4.0%.

The market will be paying particular attention to the tone of the accompanying statement as higher inflation will prevent an imminent cut in rates while weaker economic blocks the increase that was planned two months ago.

The Pound rose for the seventh day in succession against the Dollar on Friday as the UK currency continues to shrug off weakening economic reports, which indicates that the Pound's strength is largely due to an underlying weakness in the Dollar.

The UK economy has enjoyed the fastest pace of expansion since 2004, largely because of growth in the service sector and rising consumer spending.

However, reports this morning showed that UK wage negotiators agreed on the smallest salary increases since September 2006 as the median pay settlement fell to 3.2% in the quarter through October.

Amid an increased sense of instability returning to equity markets over the past week, the primary mandate for both the Bank of England and the ECB will ensure that risks to price stability do not materialise.

Therefore, the nine-strong monetary policy committee are also likely to hold UK interest rates at 5.25% this month following a strong economic performance in the third quarter.

Data Released 5th November

UK 09:30 CIPS Services PMI (October)

UK 09:30 Industrial Production (September)

U.S 15:00 ISM Non-Manufacturing (October)

written by Adam Solomon