Daily Insight

The recent negative sentiment surrounding the Pound continued yesterday as the UK currency plummeted to a fresh 2 1/2 year low against the Euro following the release of the Bank of England's quarterly inflation report.

The tone and language used in the statement seemed to suggest that the Central Bank will cut interest rates at least once in 2008 in order to prevent an economic slowdown without fanning inflation.

Consumer prices rose back above the Bank's 2.0% target in October and to the highest level in four months following widespread increases in food costs and oil prices. In the report yesterday, the BoE said that the inflation rate will rise above the target next year before settling back towards 2.0% in 2009.

The UK economy is slowing from the fastest pace of expansion in 3-years as house prices continue to fall and service industries expand at the slowest pace in nearly 5-years.

The crisis in credit markets has led to a run on the fifth biggest UK mortgage lender while Barclays reported losses of up to £1.3 billion after contagion from the U.S subprime mortgage slump spread.

As a result, the Pound has fallen back towards the support at 2.0470 versus the Dollar after peaking above 2.1000 just last week. In addition, the UK currency is poised to drop under the 1.4000 level against the Euro despite separate reports that UK unemployment fell to the lowest in nearly 3-years last month.

Jobless claims dropped 9,900 from September, the least since February 2005, as a strong labour market may support the economy and boost consumer spending.

The Dollar made gains against the Pound for a second consecutive session yesterday and also push back under 1.4700 versus the Euro despite reports that U.S retail sales increased by less than anticipated in October.

Sales increased just 0.2% following a revised 0.7% gain in September as rising fuel costs and falling home values sapped consumer sentiment.

The Dollar came under further pressure against most of the higher-yielding currencies yesterday as a separate report showed that U.S producer prices rose at a slower pace than forecast in October.

Prices paid to U.S producers increased 0.1% following a 1.1% gain in September while core prices remained unchanged, which suggests that the economy is weathering the impacts of higher energy costs.

The focus today will fall on the U.S consumer price index, which provides a broader of inflation and is expected to show that prices rose 0.3% in October and reflect the unrelenting rise in oil prices.

Data Released 15th November

UK 09:30 Retail Sales (October)

EU 09:00 ECB Monthly Bulletin

EU 10:00 Final HICP (September)

U.S 13:30 Consumer Price Index (October)

U.S 13:30 Initial Jobless Claims (w/e 10th November)

U.S 13:30 Empire State Index (November)

U.S 17:0 Philly Fed Index (November)

written by Adam Solomon