Daily Insight

The Pound snapped a three day losing streak against the Euro yesterday and also made gains versus the ailing U.S Dollar despite the distinct lack of UK economic data due for release this week.

Therefore, Sterling sentiment will be largely dependent on the economic fundamentals in Europe and the U.S and the market's demand for risk aversion amid renewed concerns over a fresh credit crisis.

In addition, the Pound received an unexpected but timely boost yesterday as Bank of England policy maker Bean said that the current level of inflation may require tighter monetary policy.

His comments yesterday will only serve to quash speculation that the Bank of England may cut interest rates as early as next month amid higher oil prices and slowing economic growth.

The market is currently pricing in three quarter-point rate cuts by the middle of next year but any further hawkish commentary from BoE officials may warrant a re-pricing of expectations.

However, the MPC may have little choice but to lower rates in the near term as UK house prices fell for a second month in November as soaring credit costs damaged consumer confidence among first time buyers.

According to a survey from Hometrack Ltd, the average cost of a home in the UK slipped 0.2% from the previous month while prices have increased 3.6% year-on-year, the smallest rise since July 2006.

The tentative price action surrounding the Euro has seen the single currency consolidate just under the record high of 1.4962 versus the Dollar and given the overall sentiment surrounding financial markets, the probability of an upside breakout towards 1.5000 seems inevitable.

Elsewhere, the Euro continues to hover around 1.3900 against the Pound and the overwhelming upside momentum will undoubtedly be of concern to policy makers as the ECB President Trichet said last week that the Central Bank is opposed to brutal moves in the currency market.

However, a host of hawkish commentary from a number of ECB officials has seen the ECB retain a bias towards tighter monetary policy as rising consumer price inflation offsets concerns over slowing economic growth.

The renewed concerns over a further crisis in credit saw an increased level of volatility towards the end of the U.S trading session last night as the Dollar plummeted against most of the 16 most actively traded currencies while the Dow Jones fell 237 points on the session.

In addition, the cohesive decline in financial markets yesterday will spark fresh concerns over the state of the U.S economy and reflects the growing possibility of a recession.

Therefore, the focus today will fall on the consumer confidence report for November as the level of spending and the degree of leniency that lenders extend to their customers may supplement the worst slump in housing since 1990.

Data Released 27th November

GER 09:00 Ifo Index (November)

U.S 15:00 Consumer Confidence (November)

written by Adam Solomon