Daily Insight

The surprisingly positive movement of the Pound over the past week has seen the U.K currency remain largely unchanged against the Euro while consolidating on the recent gains made versus the Dollar despite the Bank of England's decision to lower interest rates for the first time in two years.

The majority of the market expected a reduction in the benchmark lending rate this month but a host of economic reports released this week have shown that UK producer price inflation is rising at the fastest annual pace since 1991 amid record high food and energy costs.

Rising prices and the threat of a renewed crisis in credit has all but diminished consumer sentiment as spending drove the UK economy to the fastest pace of expansion in 3-years.

Nevertheless, the rising pace of inflation will be of concern to policy makers and that was reflected in the tone of the accompanying statement where the MPC stopped short of paving the way for a series of rate cuts over the next year.

As a result, the Pound remained resilient against the majors and received a further boost yesterday as UK unemployment fell by more than double initial forecasts and to the lowest level since 1975 as growth in the labour market continues to offset concerns over housing.

The number of jobless claims last month dropped by 11,100 from October and that has propelled the economy to expand 3.2% in the fourth quarter and continue the strongest pace of growth in seven years.

The Dollar revered much of the gains made against the Euro yesterday while also closing above 2.0400 versus the Pound as global equity markets stabilised in the wake of the Fed's decision to lower interest rates by just 25 basis points.

In terms of economic data, the negative sentiment surrounding the outlook for the U.S economy continued amid the release of the trade balance, which showed that the deficit in goods and services widened in October as the value of imported oil rose to a record level.

Despite the obvious weakness in the Dollar over that period, record high energy costs pushed up the price of imports while export growth increased 0.9% from the previous month.

Nevertheless, the gap in trade grew 1.2% to $57.8 billion while the deficit with China was the biggest ever recorded and yet excluding fuel, the trade imbalance was the smallest since 2004 as a weaker Dollar increased demand from overseas.

The focus today will fall on the U.S retail report, which is expected to show that sales increased in November as incentives and higher wages helped the consumer cope with near record fuel costs and falling home values.

Data Released 13th December

UK 09:30 Bank of England / GFK Inflation Attitude Survey

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

U.S 13:30 Retail Sales (November)

U.S 13:30 Weekly Jobless Claims (w/e 8th Dec)

U.S 15:00 Business Inventories (October)

written by Adam Solomon