Daily Insight

Following on from last week, the Pound managed to stem any further losses against the majors and recovered for a second day in a row despite the Bank of England's decision to lower UK interest rates for the first time in two-years.

The monetary policy committee cut the benchmark lending rate by 25 basis points to 5.5% as surging credit costs offsets concerns over rising inflationary pressures.

In the accompanying statement, the Central Bank said that conditions in financial markets have deteriorated adding to "downside risks" to consumer price inflation and the economy. Growth in UK service industries has cooled to the slowest pace in four years while consumer confidence has declined amid falling home values.

In the week prior to the Thursday announcement, the governor of the Bank of England, Mervyn King, expressed concerns over rising inflation in the near term but with consumer sentiment at its lowest level in 3-years, the MPC decided to take action and lower interest rates before the new year.

In the aftermath of the announcement, the Pound fell to the lowest level in nearly 3-months versus the Dollar and also recorded significant losses against the Euro amid speculation that the Bank will begin a series of cuts next year.

The positive sentiment surrounding the Euro saw the single currency make further gains against the Pound last week and also hold steady versus the Dollar as the European Central Bank kept interest rates unchanged at 4.0%.

A recent spate of positive economic reports have increased speculation that the European economy will prove resilient in the face of rising commodity prices and a strong currency.

That sentiment was reflected in the surprisingly hawkish comments from the chairman of the ECB, Jean-Claude Trichet, who said that some policy makers discussed the possibility of raising interest rates before deciding on a no change.

The annualised pace of inflation has breached the 3% barrier over the past month and the upward pressure on consumer prices means that the Central Bank are unlikely to cut rates in the short-term.

Following the Bank of England rate announcement on Thursday, the Dollar rose to the highest level since September versus the Pound and even tested the major support level at 2.0250 before the release of the monthly U.S job report.

Considering the hawkish tone of the ADP employment index earlier in the week, the Nonfarm Payrolls report was a big disappointment and failed to trigger any market volatility as job growth slowed and average earning grew in November.

However, the ADP employment report had forecast that the economy added in excess of 200,000 jobs to payrolls last month despite varying employment related reports that showed jobless claims rising week-on-week in November.

The focus this week will undoubtedly fall on the FOMC rate announcement tomorrow evening where policy makers are expected to cut interest rates for a third consecutive month.

The Job report on Friday has all but quashed speculation of another 50 basis point cut, particularly with rising inflationary pressures threatening to curtail the pace of economic growth.

Data Released 10th December

UK 09:30 Producer Price Index (November)

U.S 15:00 Pending Home Sales (October)

written by Adam Solomon