Daily Insight

Following on from last week, the Dollar appeared to make some gains against the majors but the renewed bearish sentiment surrounding the U.S currency means that further downside movement is likely over the coming weeks as we build up to the FOMC rate announcement on the 11th December.

A barrage of negative economic reports combined with the renewed level of volatility surrounding financial markets means that the Federal Reserve are likely to cut interest rates by a further 25 basis points this month.

By the close of trading on Friday, the Dollar had relinquished much of the earlier gains made against the Pound and the Euro following reports that U.S consumer spending rose less than anticipated in October.

In addition, a separate gauge of the report showed that personal incomes also failed to meet expectations, which only serves to reinforce the bearish sentiment coming from the Fed chairman, Ben Bernanke, who warned of slowing growth in the month's ahead.

Recent reports have showed that the worst housing slump in 17-years is showing few sings of abating as home values fell to the lowest level in nearly four decades. A further decline in sales combined with rising fuel costs is beginning to weigh on consumer spending, which has helped sustain growth in the U.S economy for the past six years.

The Euro has been susceptible to an increased level of volatility in equity markets of late and the single currency failed to consolidate on the recent record gains made against the Dollar amid speculation that the ECB will be forced to change tact amid slowing growth and rising inflation.

Reports in Germany last week saw retail sales post the biggest monthly decline in almost a year despite the undeniable strength of the labour market as unemployment fell by more than forecast last month.

The Euro's unrelenting rise against the Dollar will inevitably curb demand from overseas and that will eventually be of concern to policy makers given that export growth has driven the economy to the best performance since 2000.

However, the staunchly hawkish stance of the European Central Bank can be attributed to persistent inflationary concerns as consumer prices accelerated at the fastest pace in over six years in November.

The annual rate of inflation rose to 3% last month from 2.6% in October, adding pressure on the ECB to raise interest rates even as economic expansion cools.

Therefore, the focus this week will inevitably fall on the ECB rate announcement and accompanying press conference, where Jean-Claude Trichet may retain a tightening a bias in order to anchor inflation.

The Pound fell for the first month in three against the Dollar in November while also plummeting to the lowest level in four-years versus the Euro amid signs that a slowing economy may prompt the Bank of England to lower interest rates this week.

The renewed level of uncertainty surrounding financial markets has led to a crisis in confidence amongst investors as appetite for risk aversion increases and traders begin selling higher-yielding assets funded with cheap loans from Japan.

In terms of economic data, the decade long housing boom appears to be coming to an end as UK home sales fell to the lowest level in 12-years, according to a report from the Nationwide Building Society.

While elsewhere, the Pound fell under 2.0600 versus the Dollar on Friday after a report on UK consumer sentiment showed that confidence in the economy had fallen to the lowest level since March 2003.

The focus this week will undoubtedly fall on the Bank of England interest rate announcement on Thursday where the probability of an interest rate cut hangs in the balance.

There is a 50:50 chance of a reduction in borrowing costs this month but considering the hawkish rhetoric from Mervyn King and Andrew Sentence over the past week, policy makers may be divided in holding interest rates until the first quarter of next year.

Data Released 1st December

EU 09:00 Manufacturing PMI (November)

EU 10:00 Unemployment (October)

UK 09:30 CIPS Manufacturing PMI (November)

U.S 15:00 ISM Manufacturing (November)

written by Adam Solomon