Daily Insight

The Pound rebounded against almost all of the 16 most actively traded currencies yesterday, rising back above 1.4000 versus the Euro while remaining largely unchanged against the Dollar following reports that UK manufacturing output rose above initial forecasts last month.

The PMI survey on factory production increased to a reading of 54.4 in November from 52.9 the previous month and the strength of the report yesterday may have some influence on the Bank of England's interest rate announcement on Thursday.

The increased level of uncertainty surrounding UK monetary policy may provoke further market movement in the build up to the announcement as the decision to lower interest rates hangs in the balance.

The nine strong monetary policy committee must weigh up the implications of slowing economic growth against persistent inflationary concerns following record high food and fuel costs.

In addition, a report from the British Retail Consortium showed that UK retail sales increased at faster pace than anticipated in November as revenues climbed 1.2% from the same period in 2006.

Consumer spending accounts for nearly two thirds of the economy and the unexpected rise in sales last month will probably encourage policy makers to leave the benchmark lending rate unchanged at 5.75%.

The renewed negative sentiment surrounding the Dollar continued yesterday as the U.S currency recorded further losses against the majors following reports that the United Arab Emirates and Saudi Arabia were considering whether to abandon the Dollar in favour of a slightly less volatile currency.

With the Federal Reserve meeting on the 11th December drawing ever closer, the market will be paying particular attention to the tone and laguage used from Fed officals as a further 25 basis point cut is currently being priced into the market.

The European economy has accelerated at the fastest pace in seven years but the unrelenting appreciation of the Euro is beginning to cause concern amongst ECB officials, particularly considering the reliance on exports as a catalyst for stronger economic growth.

In addition, a barrage of negative economic reports combined with rising inflationary pressures may see the chairman of the Central Bank, Jean-Claude Trichet, change the tone and language of his statement on Thursday with the governing council expected to hold interest rates at 4.0%.

The staunchly hawkish stance on monetary policy is likely to continue as growth in manufacturing continues to accelerate while inflation hit 3.0% last month following record high oil prices.

Therefore, the focus this morning will switch to the producer price index, which may show that factory-gate inflation rose to an annual rate of 3.1%, up from 2.7% the previous month.

Data Released 4th December

EU 10:00 Producer Price Index (October)

written by Adam Solomon