Daily Insight

The Pound's dramatic appreciation against the Dollar showed no signs of slowing yesterday as the UK currency rose above 2.1000 during the U.S trading session and to the highest level in 26-years.

In terms of economic data, the Pound found some support as the UK shop price index for the month of October showed persistent inflationary concerns that could keep the Bank of England from lowering interest rates in the short-term.

In addition, the Pound stood firm this morning when an earlier report from HBOS plc showed that UK house prices fell for a second month in October as the credit crunch in August combined with higher interest rates diminished confidence.

The average cost of a home in the UK fell 0.5% last month following a slightly greater drop in September according to the report from the UK's biggest mortgage lender.

The focus today will undoubtedly fall on the Bank of England interest rate announcement this lunchtime where the MPC are largely expected to hold rates unchanged at 5.75%.

However, with house prices falling on a month-to-month basis and inflation still holding under the 2.0% threshold, the nine-strong committee may be divided in their decision to leave rates steady.

The Euro's unrelenting rise against the Dollar continued yesterday as the single currency rallied to a fresh record high and looks set to reach the 1.5000 level over the coming weeks.

However, the strength of the single currency will be largely dependent on the tone and language used in the accompanying statement this afternoon where the chairman of the Central Bank, Jean-Claude Trichet, may retain a hawkish stance on inflation.

The governing council are expected to leave European interest rates unchanged at 4.0% this month but with oil prices hovering just under $100 a barrel and consumer price inflation at the highest level in two years, the accompanying statement will probably focus on the inherent risks to price stability.

The current level of volatility surrounding commodity markets has seen oil prices rise to a record level and this may be the sole reason why the ECB and the rest of Europe seem unconcerned with the current strength of the Euro and the impact on overseas demand.

The considerable decline of the Dollar shows few sings of abating as the U.S currency fell to yet another record low against the Euro and also made losses against all 16 of the most actively traded currencies by the close of trading last night.

The underlying weakness in the Dollar can be partially attributed to the diversifying interest rate expectations between the U.S and other G7 nations.

The Federal Reserve have lowered rate by 75 basis points in the past two months alone and a further rate cut may be necessary to provide some relief to the banking system that is still susceptible to subprime mortgage losses.

However, some members of the Federal Open Market Committee seem unconcerned with the current level of the Dollar with Fed President Lockhart saying that the decline in the U.S currency was "manageable".

The Fed must consider that a weak Dollar combined with rising oil prices will have a sharp impact on inflation that may keep the committee from lowering interest rates beyond 4.50%.

Data Released 8th November

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 3d November)

written by Adam Solomon