Daily Insight

The renewed weakness in the Pound continued yesterday as the UK currency declined against all but one of the 16 most actively traded currencies following reports that UK house prices dropped in every region of the country except London.

The average cost of a home dropped 0.7% this month and the report from Rightmove plc showed that sellers should continue to reduce prices because a more protracted slowdown is likely over the coming months.

UK home values have risen 7.9% from this stage last year, the smallest increase in 17-months, and the report coincides with a forecast from Nationwide Building Society last week that house prices will stagnate for the first time in a decade.

The governor of the Bank of England has also voiced concerns that there are signs the UK property market looks "particularly weak" after the MPC raised interest rates five times in a year and bank's tightened lending.

Although the Pound continued to downward momentum against the Dollar yesterday, the daily losses are becoming limited and therefore a technical bounce is likely in the near-term, especially given the 'spike bottom' on Friday.

The Pound traded as low as 2.0380 last week amid increased speculation of an impending rate cut by the Bank of England and deteriorating UK fundamentals.

The Euro rose to yet another record high versus the Dollar last night and also extended the gains made against the Pound amid hawkish commentary from ECB officials, including the chairman Jean-Claude Trichet, who insisted that the possibility of slowing growth is offset with the medium terms risks to price stability.

That sentiment will probably be echoed in a report this morning where German producer prices are expected to portray an upswing in factory-gate inflation.

The Dollar fell to the lowest level on record against the Euro yesterday and declined against all but three of the most actively traded currencies on speculation that U.S housing starts will show a deepening housing recession that threatens to curtail the pace of economic expansion.

Builders may have started work on just 1.17 million homes last month, down 1.8% from September and the lowest amount in 14-years as the construction slump shows few signs of abating.

Home sales throughout the U.S are dropping and potential buyers are waiting for values to fall even more while some institutions have tightened lending conditions in the wake of the crisis surrounding the U.S subprime mortgage market.

Sales of previously owned homes fell in September to the lowest level since records began in 1999 while new home sales plummeted to an 11-year low.

The report this afternoon may weigh heavily on Dollar sentiment and force the Federal Reserve to lower interest rates for the third month in a row in order to provide some relief to the housing market.

Therefore, the focus today will also fall on the minutes from the last FOMC rate announcement may policy makers may provide an indication of the probability of further monetary easing next month.

Data Released 20th November

UK 09:30 PSNCR (October)

UK 11:00 CBI Monthly Trends (November)

U.S 13:30 Housing Starts (October)

U.S 19:00 FOMC Minutes

written by Adam Solomon