Daily Insight

Following the overwhelming decline of Sterling on Monday, the UK currency managed to rebound modestly against the Dollar yesterday and also stemmed the losses versus the Euro following reports that UK inflation unexpectedly rose in October.

Consumer prices climbed above the Bank of England's 2.0% target and to the highest level since June following an increase of just 1.8% in September. The report will
diminish the prospect of an interest rate cut in the near-term and suggests that the highest benchmark lending rate in six years has yet to rid price pressures out of the economy.

The fastest increase in food costs since 1993 combined with oil prices rising to the highest level ever recorded will see manufacturers pass on high costs to consumers and force the BoE to hold interest rates steady over the coming months as policy makers gauge the damage to economic from U.S subprime mortgage losses.

Nevertheless, the Pound failed to make any significant gains against the majors as the Royal Institute of Chartered Surveyors reported that UK house prices had fallen to the lowest level in two years.

Five interest rate increased in a year combined with a jump in credit costs is curbing demand for homes with rising mortgage rate deterring buyers.

The focus this morning will fall on the Bank of England inflation report and following the surprising increase in consumer and producer prices over the past month, the tone of the report will probably lean towards the upside risks to price stability.

The Euro consolidated under the trend support at 1.4225 versus the Pound last night and also remained largely unchanged against the Dollar despite reports in Germany that investor confidence had dropped to the lowest level in nearly 15-years in November.

The Zew index of investor and analyst expectations fell to a reading of minus 32.5 this month and to the lowest level since February 1993 after the Euro reached a record high against the Dollar and the price of oil nearly breached $100 a barrel.

The overwhelming decline in sentiment will fuel speculation that growth in Europe's premier economy will slow over the coming year following the fastest pace of expansion in seven years.

The Euro has appreciated by an incredible 8% versus the Dollar in the past three months alone and the subsequent impact on German exports will sap overseas demand.

However, the ECB are unlikely to lower interest rates in the near-term as persistent inflationary concerns will weigh on consumer spending and raise the possibility of further monetary tightening.

The renewed weakness in the Dollar has seen the U.S currency plummet to the lowest level in nearly 30-years versus the Pound amid speculation that the Federal Reserve will lower interest rates again before the turn of the year.

The increased sense of volatility over the past few trading sessions does not necessarily represent a shift in attitude towards the Dollar but more likely a result of the sharp moves in U.S equity markets and carry trades.

However, the Dollar did find some support yesterday as pending homes sales unexpectedly rose 0.2% in September instead of the 2.5% drop anticipated with the worst slump in housing for over 17-years showing few signs of abating.

The Dollar may struggle against the majors today as we build up to the release of the retail report this afternoon where sales in the U.S probably rose at a slower pace in October as falling home values and rising fuel prices begins to curb consumer spending.

Data Released 14th November

UK 09:30 BoE Inflation Report (October)

UK 09:30 Average Earnings (3 months to September)

UK 09:30 Claimant Count / Unemployment Rate (October)

EU 10:00 Flash GDP (Q3)

U.S 13:30 Producer Price Index (September)

U.S 13:30 Retail Sales (October)

U.S 15:00 Business Inventories (September)

written by Adam Solomon