Daily Insight

Following on from last week, the Pound extended its losses versus the majors on Friday, dropping back towards 2.0400 against the Dollar and consolidating under 1.4000 versus the Euro following a dismal report on UK consumer spending.

Retail sales unexpectedly declined for the first time in nine months in October as concerns over a renewed credit crunch coupled with higher interest rates dampened confidence.

Despite the jobless rate falling to the lowest level in almost 2-years, sales contracted 0.1% from the previous month amid higher food and fuel costs that will undoubtedly weigh on sentiment in the months ahead.

The report highlights the Bank of England's concerns that downside risks to economic growth are becoming increasingly apparent and that has fuelled speculation of an imminent interest rate cut.

With the distinct lack of economic data released this week, sentiment towards riskier 'high-yielding' assets is likely to remain the dominate force in financial markets.

Following reports last week that Barclays plc had suffered huge losses related to the U.S subprime mortgage crisis, markets will be paying particular attention to any reports about the impact of the credit crunch.

The unrelenting upward momentum surrounding the Euro appears to be running out of steam as the single currency again failed to react to positive economic data and hawkish commentary from the European Central Bank.

The Euro has risen to the highest level on record against the U.S Dollar in recent weeks and also rallied to a fresh 2 1/2 year high versus the Pound as the ECB continued to stoke speculation of a further interest rate increase.

Recent reports of an upward swing in the annualised pace of inflation has seen the ECB take a staunchly hawkish stance on price stability while refusing to acknowledge the possible impact of a strong Euro.

However, with commodity prices rising to new record highs, a strong currency suits Europe but the likely impact on export growth will be cause for concern in the months ahead.

The recent appetite for the U.S Dollar may only be a result of broad Sterling weakness and not necessarily a reflection of the renewed optimism in the economy as reports last week showed that consumer prices remained unchanged while industrial production unexpectedly declined.

A decline in sales prompted factories to slow production with output dropping 0.5% in the month of October, the biggest fall since January as the biggest housing slump in 17-years begins to filter through to other industries.

The Federal Reserve have slashed interest rates by 75 basis points in just two months and the Dollar may come under further pressure amid renewed speculation of a further cut in December.

Renewed weakness in the housing market combined with fresh volatility in the financial sector may prompt policy makers to lower the benchmark lending rate and therefore the focus this week will fall on the minutes from the last FOMC meeting.

Data Released 19th November

U.S 18:00 NAHB Housing Market Index (November)

written by Adam Solomon