Daily Insight

The Pound rose to yet another 26-year high versus the Dollar last night and also remained largely unchanged against the Euro despite a softer report on UK house prices and an uneventful Bank of England rate announcement.

The monetary policy committee, led by the governor, Mervyn King, kept its benchmark interest rate unchanged at the highest level in six years as policy makers resisted calls for a rate cut.

The nine-strong committee decided to leave rates on hold as oil prices continue to advance to within a whisker of $100 a barrel and rising commodity prices will undoubtedly fan inflation.

Therefore, most economists seem to think that the Bank of England will lower rates in the first quarter of 2008 while the decision yesterday suggests that policy makers are more concerned with the impact of the U.S subprime mortgage slump, which led to a crisis in credit that saw a run on Northern Rock plc.

The renewed concerns over a U.S recession will probably mean that an economic slowdown will become more apparent early next year and that's when the Bank of England are likely to initiate a rate cut.

The strength of the Pound against the Dollar seems to be derived from the overall demand for higher yielding currencies and a drop in appetite for the U.S currency.

The UK's benchmark interest rates is the highest among the Group of Seven industrialised nations while the Federal Reserve has lowered borrowing costs by 75 basis points since September.

The Euro rose to the highest level ever recorded against the Dollar yesterday and looks certain to test the 1.5000 level over the weeks despite the ECB's decision to keep interest rates unchanged at 4.0%.

Nevertheless, the economic picture looks healthy with German trade data hitting a six-month high in September as exports to emerging markets in China and Russia is offsetting softer demand from the U.S.

In addition, the tone and language used in Trichet's opening statement yesterday seemed to suggest that the ECB's governing council are more concerned with rising inflation than slowing economic growth.

Consumer prices are currently at the highest level in two years while a strong Euro is helping offset rising inflationary pressures as the price of oil continues to hover around $100 a barrel. The chairman of the Central Bank, Jean-Claude Trichet, indicated yesterday that the ECB are concerned with the Euro's advance and the current level of inflation.

The overwhelming decline of the Dollar continued yesterday as the U.S currency fell against 11 out of the 16 most actively traded currencies with traders raising bets that the Federal Reserve will lower interest rates for the third consecutive month in December.

The Fed have the unenviable task of bolstering U.S economic growth and monitoring core inflation amid rising commodity prices. The Dollar has fallen to a record low against the Euro and to the weakest level in nearly 30-years versus the Pound before a report this afternoon, which may show that U.S consumer sentiment is the worst since May 2006.

In addition, the Dollar may struggle to bounce back as the U.S trade balance is expected to show that the deficit in goods and services actually widened in September.

The gap in trade probably increased from the lowest level in seven months as the price of imported oil jumped to a record level, even as a weak Dollar spurs demand from overseas.

Data Released 9th November

UK 09:30 Trade Balance (September)

U.S 13:30 Export Prices (October)

Import Prices

U.S 13:30 Trade Balance (September)

U.S 15:00 Michigan Sentiment (November Prelim)

written by Adam Solomon