Daily Insight

The Pound drove higher against the ailing U.S Dollar yesterday and traded at a fresh 26-year high overnight, although the UK currency lost further ground versus the Euro amid reports that both the GDP estimate and the BRC retail sales monitor were weaker than the previous month.

In addition, the governor of the Bank of England, Mervyn King, gave an interview to Radio 4 and said that it may take months before commercial banks realise the extent of their losses following the collapse of the U.S subprime mortgage market.

The tone and language used in the statement did also suggest that Bank's were repairing the damage and that "things have improved significantly since the crisis in credit markets over the summer".

The dramatic rise in borrowing costs has led to some banks, including Citigroup Inc to report losses of up to $20 billion while the fallout from a heavy increase in U.S subprime mortgage defaults led to a run on the UK's fifth biggest lender, Northern Rock plc.

Nevertheless, the Pound is still likely to rally higher against the Dollar and continue to achieve multi-decade highs because the inherent weakness surrounding the U.S currency has overshadowed a host of weak economic reports and speculation of a UK rate cut early next year.

As a result, Dollar buyers would be well positioned to implement a working stop order in the market to protect against a sudden downward move.

The renewed weakness in the Dollar saw the U.S currency fall against all of the 16 most actively traded currencies yesterday, plummeting to the lowest level since June 1981 versus the Pound amid reports that Chinese officials plan to diversify $1.43 trillion of reserves in response to a weakening currency.

The vice chairman of China's National People's Congress, Cheng Siwei, told a conference in Beijing that the Dollar is "losing its status as the world currency".

Chinese investors have so far reduced their holdings of U.S treasuries by 5% in the five months through August and the Dollar may continue to decline amid speculation of further rate cuts to come.

The dramatic appreciation of the Euro continued yesterday as the single currency smashed through another record high against the Dollar and slowly inched towards the psychologically important 1.5000 level.

The positive sentiment surrounding the Euro continued as broad Dollar weakness combined with reports that so called factory-gate inflation had accelerated last month.

Persistent inflationary concerns and oil prices rising to within a whisker of $100 a barrel has forced the ECB to retain a tightening bias with consumer prices rising above the 2.0% target for the first time in two years.

In addition, the Purchasing Managers' index of European service industries showed that growth in the sector slowed by more than expected in October. The European Central Bank are likely to leave interest rates unchanged tomorrow but the tone and language used in the accompanying statement may prompt further speculation of a rate increase and propel the Euro higher against both the Dollar and the Pound.

Considering the instability surrounding equity markets at present, the chairman of the ECB, Jean-Claude Trichet, may have taken steps to lower interest rates in order to provide some relief to the banking system.

However, commodity prices have jumped higher and oil closed above $98 last night, which will only exacerbate inflation in the months to come and that will keep the ECB from lowering borrowing costs.

Data Released 7th November

GER 11:00 Industrial Production (September)

U.S 13:30 Labour Costs (Q3)

- Productivity

U.S 15:00 Wholesale Inventories (September)

written by Adam Solomon