Daily Insight

The renewed weakness in Sterling continued to dominate the market yesterday as the UK currency plummeted to the lowest level in four years versus the Euro following reports that Bank of England policy makers voted 7-2 to keep UK interest rates unchanged this month.

The majority of the nine-strong committee agreed that further evidence was needed before a potential reduction in rates but David Blanchflower was joined by Deputy Governor, John Gieve, in arguing for the first cut in more than two years.

Over the past month, UK consumer prices have risen back above the Bank's 2.0% target and record high oil and commodity prices may stoke the already persistent
inflationary concerns.

Nevertheless, the tone and language used in the report suggests that the Central Bank could lower the benchmark lending rate as early as next month amid renewed uncertainty surrounding financial markets.

The collapse of the U.S subprime mortgage market led to a run on the fifth biggest UK mortgage lender, Northern Rock plc and a crisis in credit will inevitably lead to drop in consumer spending.

In a statement last week, Mervyn King acknowledged that growth in the UK economy is poised to slow significantly over the next year while the Bank of England's quarterly inflation report indicated that there will at least one rate cut in 2008.

The positive sentiment surrounding the Euro has seen the single currency appreciate 11% against the Dollar over the past three months alone as the staunchly hawkish stance of the ECB combined with the remarkable resilience of the European economy has contrasted perfectly to the deterioration of U.S economic growth.

The Euro's unprecedented rise against the Dollar will be cause for concern to policy makers as overseas demand dwindles and the economy slows.

Nevertheless, a spate of recent hawkish statements from a number of ECB officials has focused on higher inflationary concerns rather that the probable impact on the economy.

With oil prices rising towards $100 a barrel, producer price inflation will inevitably keep the ECB from lowering interest rates in the near-to-medium term.

The recent pattern of market movement has been compared to the volatility we saw in August where the Federal Reserve shocked the market by reducing the discount lending rate after raising borrowing costs aggressively over the past two years.

Two year bond yields fell below 3% yesterday to close at the lowest level in nearly 3-years as traders become increasingly concerned about the fate of the U.S economy.

The Dollar came under further pressure against both the Euro and the Pound yesterday following comments from the U.S Treasury Secretary, Hank Paulson, who said that home loan defaults should be substantially greater next year.

In terms of economic data, an index of leading economic indicators showed that the economy is forecast to slow significantly in 2008 as the Conference Board's index fell 0.5% in October following a 0.1% gain the previous month.

Elsewhere, first time jobless claims and the Michigan sentiment survey were both better than expected but were both at levels consistent with slowing economic growth.

The Dollar may come under further pressure today as the Thanksgiving holiday leaves the U.S currency susceptible to further losses against most of the 16 most actively traded currencies.

Data Released 22nd November

EU 09:00 Current Account (October)

EU 10:00 Industrial Orders (September)

written by Adam Solomon