Daily Insight

The Dollar came under renewed pressure against the Pound yesterday and suffered a sharp intraday reversal versus the Euro having fallen to a low of 1.4712 earlier in the session.

The volatility surrounding U.S stocks has seen the Dow rally 500 points over the past two trading days and recent comments from a number of Fed officials have portrayed varying sentiment on the outlook for the U.S economy.

Earlier in the week, hawkish comments from both Evans and Plosser seemed to focus on rising inflationary concerns while a statement yesterday from FOMC member Kohn indicated that growth in the economy would continue to slow as the housing slump deepens.

In terms of economic data, Dollar sentiment was further hampered amid reports that sales of existing homes fell to the lowest level in eight years. Purchases dropped 1.2% in October, which was more than initial forecasts, and fell to an annual rate of 4.97 million, the fewest amount since records began in 1999.

Sales were down 0.7% from this stage last year as loan restrictions and the prospect of further price declines has led to tighter lending conditions.

Elsewhere, a separate report from the Commerce department showed that a weak Dollar is failing to provide a boost to U.S manufacturers as orders for durable goods fell more than anticipated in October.

The report supports comments yesterday from Federal Reserve Vice Chairman Donald Kohn, who warned that the market "turbulence" may discourage business and consumer spending.

The Euro managed to claw back most of the losses suffered against the Dollar yesterday but continued the recent downside momentum versus the Pound despite reports that German inflation accelerated to the fastest pace in eleven years.

The harmonized index of European consumer prices rose 3.3% from a year earlier after increasing 2.7% the previous month. Thus far, the European Central Bank have refused to panic over the Euro's overwhelming appreciation against the Dollar given that oil prices have increased 89% since January while foods costs rose to a record level.

Therefore, the Euro's ascent to a record high against the Dollar is making imports cheaper while persistent inflationary concerns means that the ECB are unlikely to lower interest rates in the near-to-medium term.

The Pound rallied against both the Euro and the Dollar last night amid renewed appetite for high yielding currencies combined with a hawkish commentary from Bank of England policy maker Andrew Sentence.

Although many economists and traders are anticipating a cut from the BoE in December, Sentence's comments yesterday seemed to suggest that setting monetary policy in the months ahead will be particularly challenging.

The monetary policy committee must attempt to balance a slowing economy against the renewed risks to price stability as inflation rises above the 2.0% target following rising fuel and food costs.

The lack of UK economic data released this week means that the market has yet to receive any fresh direction on the probability of UK interest rate cut.

Data Released 29th November

GER 09:00 Unemployment (November) (October)

U.K 09:30 Mortgage Applications (October)

U.K 11:00 CBI Distributive Trades Balance (November)

U.S 13:30 GDP (Q3 Revised)

- Deflator

U.S 13:30 Initial Jobless Claims (w/e 24th November)

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

written by Adam Solomon