Daily Insight

Following on from last week, the positive sentiment surrounding the Pound saw the UK currency rally to a fresh record high against the Dollar before reports on Friday that shares in Barclays plc were temporarily suspended after the stock price fell by 9.1%.

As a result, the Pound declined heavily against all 16 of the most actively traded currencies and by the close of trading on Friday, the UK currency was approaching the 2-year low at 1.4225 versus the Euro.

The increased sense of volatility surrounding credit markets sent shares in the UK's third biggest mortgage lender plummeting and that will only heighten concerns that a further crisis in credit looms.

Elsewhere, the Pound snapped a seven day winning streak against the Dollar amid reports that the U.K trade deficit had widened to a record level in September as exports to countries outside the EU stalled.

The gap in trade was £7.8 billion, the most since records began in 1697, compared with just £6.9 billion the previous month as a strong Pound and slowing economic growth cooled demand for British made goods.

The focus this week will inevitably fall on the tone of the Bank of England's inflation report on Tuesday where consumer prices are expected to rise to 1.9% year-on-year in October from 1.8% the previous month.

The unrelenting rise of the Euro saw the single currency rocket to the highest level on record against the Dollar while further gains look likely amid diverging interest rate expectations between Europe and the U.S.

Last week, the European Central Bank, led by the chairman, Jean-Claude Trichet, elected to keep the benchmark lending rate on hold at 4.0% as inflation shows signs of accelerating while demand from emerging markets in China and Russia sent exports higher.

The hawkish stance in the accompanying press conference seemed to suggest that policy makers are more concerned with tackling inflation than the possible threat of a slowing economy.

Consumer price inflation is currently at the highest level in 2-years while a strong Euro is helping cushion the blow of oil prices reaching the highest level ever recorded.

The spotlight this week will remain on oil prices, which continue to threaten the $100 barrier as OPEC refuses to increase production while no change in output levels is expected.

The recent negative sentiment surrounding the Dollar continued on Friday as the U.S currency fell to fresh record low against the Euro but took advantage of broad Sterling weakness following reports that the U.S trade deficit unexpectedly narrowed in September.

The gap in goods and services shrank by 0.6% to the lowest level since May 2005 as a weak Dollar combined with the strongest pace of global expansion in nearly 30-years increased overseas demand for U.S made goods.

Export growth has reached a record level for the past seven consecutive months, which represents the longest surge since 2000 and may offset the worsening housing recession that is weighing heavily on consumer sentiment.

The preliminary estimate of the University of Michigan sentiment index showed that confidence among U.S consumers fell to the lowest level in two years this month amid rising fuel prices and falling home values.

The report on Friday will only raise concerns that consumer spending, which accounts for over two thirds of economic growth, may continue to weaken over the coming months and force the Federal Reserve to lower interest rates further.

Data Released 12th November

UK 09:30 CIPS Services PMI (October)

U.K 09:30 Industrial Production (October)

U.S 15:00 ISM Non-Manufacturing (October)

written by Adam Solomon