Daily Insight

The Pound declined considerably against the majors yesterday, dropping through the support at 1.4220 versus the Euro and closing well under 2.0700 versus the Dollar despite reports that UK producer prices rose at the fastest annual pace in 12-years.

So called factory-gate inflation rose 3.8% year-on-year in October following a 2.8% increase the previous month as manufacturers passed on record high oil prices.

In the aftermath of the report, the Pound continued to downward momentum against almost all of the 16 most actively traded currencies as rising fuel costs will only add to the persistent inflationary concerns facing the Bank of England.

The Monetary Policy Committee will probably keep UK interest rates on hold for the foreseeable future as a slowing economy will be offset with higher inflation.

Recent reports have indicated that the pace of growth in the manufacturing and service industries contracted for the first time last month while a separate index of the UK housing market showed that prices dropped to the lowest level in over two years.

The focus this morning will undoubtedly fall on the October consumer price index where the broader measure of inflation is expected to show that prices increased to an annual pace of 1.9%.

The Dollar plummeted to the lowest level in almost 30 years versus the Pound last week and also fell to a record low against the Euro as the Federal Reserve lowered interest rates by 75 basis points in just two months.

Nevertheless, the Dollar staged a remarkable rally against the Pound, dropping back towards 2.0600 by the close of trading last night while also snapping a five-day losing streak versus the Euro despite the lack of U.S economic data released.

The positive sentiment surrounding the Euro saw the single currency break out of the tight trading range versus the Pound and accelerate to the strongest level in over two years amid speculation of a European rate hike over the coming months.

The European Central Bank have adopted a staunchly hawkish stance over the past month despite the Euro's unrelenting rise against the Dollar and the subsequent impact on the economy.

Economic growth in the Euro-region has accelerated at the fastest pace in seven years and that is largely due to demand from overseas for European based goods.

Therefore, a strong Euro should be cause for concern but the tone and language used in a statement from the ECB President, Jean-Claude Trichet, last week seemed to suggest that policy makers are unperturbed with the current strength of the Euro and more concerned with rising inflation.

Data Released 13th November

UK 09:30 CPI Inflation Report (October)

GER 10:00 ZEW Index (November)

EU 10:00 Industrial Production (September)

U.S 20:00 Pending Home Sales (September)

written by Adam Solomon