Daily Insight

The volatility surrounding the Pound increased yesterday as the UK currency relinquished much of the earlier gains against the majors as economic data was mixed and provided little insight into the Bank of England interest rate decision on Thursday.

However, UK retail sales increased at a faster pace than anticipated in November as stores offered incentives to customers in order maintain the pace of consumer spending.

Revenues climbed 1.2% from the same period in 2006 while overall purchases increased 3.1% from October according to reports from the British Retail Consortium.

The Bank of England have recently stated that consumer spending has helped power the fastest period of economic growth in three years and the significance of the report yesterday means that the MPC are unlikely to lower interest rates this month.

Nevertheless, the Pound has declined heavily against the Dollar overnight and dropped back under 1.3900 versus the Euro as the market continues to price in a 50:50 split on whether the Central Bank will cut rates on Thursday.

The focus this morning with fall on the Purchasing Managers' index on UK service sector growth, which is expected to provide some clarity into the rate decision tomorrow with growth expected to moderate on the month in November.

Therefore, the unrelenting and widespread sterling weakness may continue today and Euro and Dollar buyers would be well placed to insert stop orders into the market to protect against further downside movement.

Despite the fundamental lack of U.S economic data released yesterday, the Dollar made unlikely but modest gains against the Pound and looks poised to strengthen further throughout the course of the day as the lack of direction surrounding UK monetary policy continues to weigh on the Pound.

However, the Dollar failed to rally against the resurgent Euro as Fed Fund Futures are now pricing in a 50% chance of a half point cut this month, which will mean that the FOMC have lowered the benchmark lending rate by 1.25% in just three months.

The recent upside movement of the Dollar doesn't coincide with market expectations and therefore the data released over the coming week may promote an increased level of volatility surrounding the U.S currency.

The positive sentiment surrounding the Euro continued yesterday as the single currency made widespread gains against both the Pound and the Dollar following reports that European producer prices surged in October to the fastest pace this year.

The gauge of inflation mirrors recent reports on consumer prices as record high food and energy costs saw the annual rate of inflation accelerate to 3.0%. The report yesterday shows that manufacturers are passing on higher costs to the consumer as prices rose to an annualized rate of 3.3% and well above the ECB's 2.0% target.

Higher inflation and slowing economic growth may see a period of stagflation over the coming months as the turmoil surrounding financial markets intensifies while the U.S housing recession deepens.

Therefore, the ECB will have a difficult decision to make on Thursday and although policy makers may keep rates on hold at 4.00%, the tone and language used in the accompanying statement may reflect concerns over slowing economic growth.

In terms of economic data, the Euro may struggle to consolidate on the gains made against the majors as growth in European service industries cools and retail sales decline.

Data Released 5th December

EU 09:00 Services PMI (November)

UK 09:30 CIPS Services PMI (October)

UK 09:30 Industrial Production (October)

- Manufacturing Production

EU 10:00 Retail Sales (October)

U.S 13:15 ADP Employment (November)

U.S 13:30 Labour Costs (Q3 Revised)

U.S 15:00 Factory Orders (October)

U.S 15:00 ISM Non-Manufacturing (November)

written by Adam Solomon