Daily Insight

The Pound unexpectedly performed very well against the majors yesterday, rising back above 2.0600 versus the Dollar and briefly trading above 1.4000 against the Euro as we build up to the release of the minutes from the Bank of England's last policy meeting.

The overwhelming decline in Sterling sentiment has seen the UK currency fall to the lowest level in nearly three years versus the Euro amid increased speculation that the Central Bank will begin cutting interest rates next month in accordance with slowing economic growth.

The monetary policy committee collectively voted to hold interest rates steady at 5.75% this month and the report this morning will provide an insight into how the panel voted and the chances of a surprise rate cut in December.

The Pound may come under significant pressure if more than one policy maker has joined David Blanchflower in recommending a quarter-point reduction in the benchmark lending rate.

The governor of the Bank of England, Mervyn King, released the Bank's quarterly inflation report last week where he seemed to be more concerned about growth in the economy than the upside risks to inflation and that may prove pivotal in the timing of the next move in UK interest rates.

The unrelenting rise of the Euro saw the single currency approach the coveted 1.5000 level versus the ailing U.S Dollar and this morning we have consolidated well under 1.4000 versus the Pound despite the lack of fundamental data released in the Euro-zone.

Traditionally, the U.S Thanksgiving Holiday is a quiet week in the market but the sharp volatility this year suggests that the Euro may indeed breach 1.5000 and rise to the strongest level on record.

In recent weeks the ECB have adopted a staunchly hawkish stance on monetary policy and have seemed unperturbed with the current strength of the Euro despite the likely impact on the economy.

However, comments from ECB official, Junker, does suggest that the Central Bank are starting to worry about the current exchange rate despite rising oil prices stoking the already persistent inflationary concerns.

The overwhelming and rapid decline of the Dollar saw the U.S currency make further losses versus the Euro yesterday and also trade lower against almost all of the 16 most actively traded currencies following reports that U.S housing starts fell to a 14-year low in October.

Home building permits slumped to the lowest level since 1993 while builders broke ground on a larger number of new homes that expected but the worst slump in housing for 17-years has yet to show signs of peaking.

Building permits fell 6.6% to an annual pace of 1.178 million, the fifth consecutive monthly decline, despite an unexpected jump in housing starts.

The focus yesterday inevitably fell on the FOMC minutes last night where Fed forecasts showed that risks to growth are skewed to the downside and therefore a further quarter-point rate cut may be necessary next month.

However, the U.S Dollar has continued to decline against the majors and the unrelenting weakness in the currency is causing concern amongst countries who hold Dollar denominated assets.

China and the Gulf nations have complained that their investments into U.S assets are falling while global inflation is rising and if the Dollar continues to lose value then there will come a point where the losses become intolerable.

Data Released 21st November

UK 09:30 BoE MPC Minutes (October)

U.S 13:30 Initial Jobless Claims (w/e 17th November)

U.S 15:00 Leading Indicators (October)

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

written by Adam Solomon