Daily Insight

The negative sentiment surrounding the Pound continued yesterday as the UK currency plummeted to the lowest level in four years versus the Euro and also dropped below 2.0300 against the Dollar as we build up to the Bank of England interest rate announcement this lunchtime.

A recent spate of poor economic reports have increased the possibility of a quarter-point rate cut this month as the MPC balance persistent inflationary concerns against a slowing economy.

The renewed sense of uncertainty in financial markets stems from the turmoil following the U.S subprime mortgage crisis, which led to a run on UK mortgage lender Northern Rock.

As a result, UK consumer confidence has fallen to the lowest level in over three years as diminishing sentiment combined with higher borrowing costs and rising prices discouraged spending.

Elsewhere, the Pound fell to the lowest rate in 6-weeks versus the Dollar amid reports that UK house prices declined by the most in nearly a year last month as tightening credit conditions may see the decade long housing boom come to an end.

Therefore, the Bank of England may have little choice but to lower the benchmark lending rate today amid signs that the housing market is heading towards recession while juggling higher consumer costs and rising inflation.

However, the outcome of the lunchtime announcement is still finely balanced with many economists split on the decision as only two on the nine strong monetary policy committee actually recommended a cut last month.

Although the Euro has risen to the highest level versus the Pound since 2003, the single currency struggled to consolidate on the gains made against the Dollar ahead of the ECB press conference this afternoon where policy makers may signal slowing economic growth in the Euro-zone.

The Central Bank are expected to hold interest rates steady at 4.0% as inflation breached the 3.0% barrier in October amid record high food and energy costs.

However, the tone and language used in the accompanying press conference will be heavily scrutinized as the market looks for an indication on future policy and the chances of monetary easing next year.

The Dollar has made widespread gains against both the Euro and the Dollar despite another barrage of weak economic report and speculation that Friday's nonfarm payrolls numbers will point to a softening of the labour market.

The number of people out of work and claiming benefits has risen sharply over the past month but the ADP employment report yesterday showed that companies in the U.S have added 189,000 jobs in November.

The overwhelming increase more than triples market expectations and that will provide an insight into nonfarm payrolls tomorrow where the unemployment rate may increasr to 4.8% while average hourly earnings may rise by 0.3% from October.

Data Released 6th December

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference & Quarterly Economic Froecasts

GER 10:00 Industrial Orders (October)

U.S 13:30 Initial Jobless Claims (w/e 1st December)

written by Adam Solomon