Daily Insight

The renewed bearish sentiment surrounding the Pound continued yesterday as the UK currency plummeted 0.9% against the Dollar and recorded significant losses versus the Euro following two consecutive days of gains.

A report from Nationwide Building Society showed that UK house prices dropped by the most in 12-years this month while mortgage approvals fell to the lowest level in nearly 3-years.

The average cost of a home declined 0.8% from October, which represents the single biggest monthly decline since June 2005 and the report provides yet further evidence that the decade long housing boom is coming to an end.

In addition, the number of UK mortgage applications plummeted to the lowest level since February 2005 amid renewed concerns over a second credit crunch and the BoE's decision to lift interest rates to the highest level in 6-years.

The gloomy outlook for the UK economy has led to speculation that growth will slow and that will prompt the Bank of England to lower interest rates by 75 basis points over the next six months.

Strong consumer spending, low unemployment and rising home values have been the catalyst for the UK economy reaching the fastest pace of economic expansion since 2004. However, Nationwide predicts that UK house prices will stall next year and contract for the first time since 1992 as a slowing economy and a crisis in credit curbs demand.

The volatility surrounding equity markets yesterday and the failure to extend their gains weighed on most high-yielding currencies, including the Euro, which fell 0.4% against the Dollar last night.

Economic data in the Euro-zone was mixed yesterday and therefore the move can be attributed to a broad base Dollar recovery after the U.S currency fell to a fresh record low earlier this week.

The strength of the labour market was again apparent in Germany as unemployment fell by more than initial forecasts in October while retail data in France was weaker. Elsewhere, the Euro has struggled to recover this morning and has traded back above 1.4000 versus the Pound after German retail sales had the biggest drop in nearly a year last month.

Despite strong growth in the labour market, sales fell 3.3% from September as rising food and fuel costs hamper spending amid signs that growth in the German economy is losing momentum.

Although the Dollar appeared to make gains against both the Pound and the Euro yesterday, the negative sentiment surrounding the U.S currency continues as a barrage of negative economic reports increase the prospect of further monetary easing next month.

The worst housing slump in nearly 17-years combined with slowing economic growth has seen the Federal Reserve lower interest rates by 75 basis points in just two months and yesterday a report from the Commerce Department showed a further drop in the sales of new homes.

The collapse of the U.S subprime mortgage market and the turmoil surrounding the financial sector has seen projections that the housing recession will extend in to next year even as home values dropped by the most in nearly 40-years.

Elsewhere, a separate report on the revised estimate of U.S gross domestic product showed that growth in the economy accelerated in the third quarter before the impact of the housing slump was realised.

Data Released 30th November

EU 10:00 EC Business Climate (November)

EU 10:30 EC Economic Sentiment (November)

EU 10:00 GDP (Q3 Revised)

EU 10:00 HICP Flash (November)

UK 10:30 Gfk Consumer Confidence (November)

U.S 13:30 Personal Income / Consumption (October)

U.S 14:45 Chicago PMI (November)

U.S 15:00 Construction Spending (October)

written by Adam Solomon

The Dollar came under renewed pressure against the Pound yesterday and suffered a sharp intraday reversal versus the Euro having fallen to a low of 1.4712 earlier in the session.

The volatility surrounding U.S stocks has seen the Dow rally 500 points over the past two trading days and recent comments from a number of Fed officials have portrayed varying sentiment on the outlook for the U.S economy.

Earlier in the week, hawkish comments from both Evans and Plosser seemed to focus on rising inflationary concerns while a statement yesterday from FOMC member Kohn indicated that growth in the economy would continue to slow as the housing slump deepens.

In terms of economic data, Dollar sentiment was further hampered amid reports that sales of existing homes fell to the lowest level in eight years. Purchases dropped 1.2% in October, which was more than initial forecasts, and fell to an annual rate of 4.97 million, the fewest amount since records began in 1999.

Sales were down 0.7% from this stage last year as loan restrictions and the prospect of further price declines has led to tighter lending conditions.

Elsewhere, a separate report from the Commerce department showed that a weak Dollar is failing to provide a boost to U.S manufacturers as orders for durable goods fell more than anticipated in October.

The report supports comments yesterday from Federal Reserve Vice Chairman Donald Kohn, who warned that the market "turbulence" may discourage business and consumer spending.

The Euro managed to claw back most of the losses suffered against the Dollar yesterday but continued the recent downside momentum versus the Pound despite reports that German inflation accelerated to the fastest pace in eleven years.

The harmonized index of European consumer prices rose 3.3% from a year earlier after increasing 2.7% the previous month. Thus far, the European Central Bank have refused to panic over the Euro's overwhelming appreciation against the Dollar given that oil prices have increased 89% since January while foods costs rose to a record level.

Therefore, the Euro's ascent to a record high against the Dollar is making imports cheaper while persistent inflationary concerns means that the ECB are unlikely to lower interest rates in the near-to-medium term.

The Pound rallied against both the Euro and the Dollar last night amid renewed appetite for high yielding currencies combined with a hawkish commentary from Bank of England policy maker Andrew Sentence.

Although many economists and traders are anticipating a cut from the BoE in December, Sentence's comments yesterday seemed to suggest that setting monetary policy in the months ahead will be particularly challenging.

The monetary policy committee must attempt to balance a slowing economy against the renewed risks to price stability as inflation rises above the 2.0% target following rising fuel and food costs.

The lack of UK economic data released this week means that the market has yet to receive any fresh direction on the probability of UK interest rate cut.

Data Released 29th November

GER 09:00 Unemployment (November) (October)

U.K 09:30 Mortgage Applications (October)

U.K 11:00 CBI Distributive Trades Balance (November)

U.S 13:30 GDP (Q3 Revised)

- Deflator

U.S 13:30 Initial Jobless Claims (w/e 24th November)

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

written by Adam Solomon

The negative sentiment surrounding the Dollar has seen the U.S currency plummet to fresh multi-year lows against all of the 16 most actively traded currencies as the Federal Reserve continue to lower interest rates to provide some relief to the ailing U.S economy.

Nevertheless, the Dollar stemmed any further losses against the majors yesterday as the focus of attention switched to the volatility in the stock market amid reports that Citigroup had received a cash injection of $7.5 billion in the hope of stabilizing the Bank following another round of redundancies earlier this week.

In terms of economic data, the Dollar also stood firm amid reports that U.S consumer confidence fell by more than initial forecasts in November as surging fuel costs and falling home values damage sentiment.

The index of confidence fell to a reading of 87.3 this month, the lowest level since the months that followed Hurricane Katrina in 2005 while home values decreased 4.5% year-on-year in the third quarter.

The gloomy outlook for the U.S economy has Fed policy makers severely cut growth forecasts as the worsening housing slump begins to weigh on consumer spending.

The report yesterday will only increase speculation that the Fed's Open Market Committee may continue monetary easing on the 11th December.

The European Central Bank have adopted a staunchly hawkish stance on monetary policy in recent months and that has seen the Euro rally to the highest level ever recorded against the Dollar and to a four-year high versus the Pound.

Despite mounting political pressure and market criticism, the ECB have chosen to focus almost exclusively on the impact of rising inflationary pressures, particularly with the price oil soaring to within a whisker of $100 a barrel.

However, following an increase in production in Saudi Arabia, oil prices fell $2 throughout the course of yesterday while German business confidence declined to the lowest level in almost two years.

The Ifo sentiment index slipped to a reading of 103.3 this month, the lowest level since January 2006, and as a result, the Euro fell against both the Pound and the Dollar by the close of trading last night.

Considering the fundamental lack of UK economic data released this week, the Pound is largely driven by risk appetite and the tone of U.S economic reports as the market looks for further direction on UK monetary policy.

The Bank of England have so far been reluctant to comment on the probability of an interest rate cut next month as mounting inflationary concerns may keep the Central from lowering rates until the first quarter of next year.

The tone of the minutes from the Bank's last policy meeting and the language used in the quarterly inflation report seemed to indicate that policy makers would need to lower borrowing costs by 75 basis points over the next year in order to stabilize the economy and provide some relief to the financial sector.

Data Released 28th November

EU 09:00 M3 / 3 Month Moving Average (October)

U.S 13:30 Durable Goods Orders (October)

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

U.S 19:00 Fed Beige Book

written by Adam Solomon

The Pound snapped a three day losing streak against the Euro yesterday and also made gains versus the ailing U.S Dollar despite the distinct lack of UK economic data due for release this week.

Therefore, Sterling sentiment will be largely dependent on the economic fundamentals in Europe and the U.S and the market's demand for risk aversion amid renewed concerns over a fresh credit crisis.

In addition, the Pound received an unexpected but timely boost yesterday as Bank of England policy maker Bean said that the current level of inflation may require tighter monetary policy.

His comments yesterday will only serve to quash speculation that the Bank of England may cut interest rates as early as next month amid higher oil prices and slowing economic growth.

The market is currently pricing in three quarter-point rate cuts by the middle of next year but any further hawkish commentary from BoE officials may warrant a re-pricing of expectations.

However, the MPC may have little choice but to lower rates in the near term as UK house prices fell for a second month in November as soaring credit costs damaged consumer confidence among first time buyers.

According to a survey from Hometrack Ltd, the average cost of a home in the UK slipped 0.2% from the previous month while prices have increased 3.6% year-on-year, the smallest rise since July 2006.

The tentative price action surrounding the Euro has seen the single currency consolidate just under the record high of 1.4962 versus the Dollar and given the overall sentiment surrounding financial markets, the probability of an upside breakout towards 1.5000 seems inevitable.

Elsewhere, the Euro continues to hover around 1.3900 against the Pound and the overwhelming upside momentum will undoubtedly be of concern to policy makers as the ECB President Trichet said last week that the Central Bank is opposed to brutal moves in the currency market.

However, a host of hawkish commentary from a number of ECB officials has seen the ECB retain a bias towards tighter monetary policy as rising consumer price inflation offsets concerns over slowing economic growth.

The renewed concerns over a further crisis in credit saw an increased level of volatility towards the end of the U.S trading session last night as the Dollar plummeted against most of the 16 most actively traded currencies while the Dow Jones fell 237 points on the session.

In addition, the cohesive decline in financial markets yesterday will spark fresh concerns over the state of the U.S economy and reflects the growing possibility of a recession.

Therefore, the focus today will fall on the consumer confidence report for November as the level of spending and the degree of leniency that lenders extend to their customers may supplement the worst slump in housing since 1990.

Data Released 27th November

GER 09:00 Ifo Index (November)

U.S 15:00 Consumer Confidence (November)

written by Adam Solomon

Following on from last week, the outlook for the Pound deteriorates almost by the day as the UK currency continued to slide against most of the 16 most actively traded currencies following reports that UK economic growth unexpectedly slowed.

Gross domestic product rose 0.7% in the third quarter, which fell slightly below initial forecasts and to the weakest level in a year as growth in service industries cooled and factory production declined.

The report on Friday will only add to concerns that the UK economy is slowing but the Bank of England will have to balance slower growth against record high commodity prices, which will only add to the persistent inflationary pressures.

Therefore, the Pound may struggle to make gains in the build up the December rate announcement where speculation is building that the monetary policy committee will cut interest rates by 25 basis points.

The Bank's quarterly inflation report seemed to suggest that a reduction in the benchmark lending rate would be necessary to spur growth as the impact from the U.S subprime mortgage crisis limits access to credit.

The Euro has appreciated 12% against the Dollar this year and continued to make robust gains against the U.S currency last while also rising to the highest level in 4-years versus the Pound as the ECB adopt a staunchly hawkish stance in the face of slowing growth.

However, towards the end of the week, the Euro failed to hold on to those gains and struggled to sustain the upside momentum against the Dollar amid a host of surprisingly poor economic fundamentals.

European manufacturing expanded at a moderate pace in October while growth in service industries stalled and French consumer spending declined by the most in over a year.

The overwhelming strength of the Euro has been offset with persistent inflationary concerns as oil prices continue to flirt with $100 a barrel.

Therefore, the ECB's governing council must balance the renewed risks to price stability against the possibility of slowing economic growth and that may prompt the Central Bank to alter their staunchly hawkish monetary stance over the coming months.

No Data Released 26th November

written by Adam Solomon

The Thanksgiving holiday has seen a lot price action surrounding financial markets and yesterday the Dollar dropped to the lowest level ever recorded versus the Euro amid speculation that U.S credit market losses will force the Federal Reserve to lower interest rates. The FOMC have lowered the benchmark lending rate by 75 basis points over the past two months and the Dollar is poised to record its biggest weekly decline since September after both Merrill Lynch & Co and Citigroup Inc said that the Fed will need to lower interest rates by 1 percentage point. The dwindling sentiment surrounding the U.S currency is likely to continue over the coming weeks as the worst slump in housing for over 17-years combined with slowing economic growth may encourage policy makers to lower rates next month. U.S house prices fell in a third of all U.S cities in the last quarter as tighter lending conditions combined with a slowing economy saw sales decline 14% nationwide. The report from the National Association of Realtors said that prices dropped in 54 metropolitan states in the third quarter while sales tumbled 2.0%. Declines in sales and home values signal that the housing slump may extend into the next year, which mirrors the slowdown 18-years ago that ended with the recession in 1991.


The Pound rose to a high of 2.0750 against the Dollar overnight but has fallen significantly in early trade this morning after UK economic growth unexpectedly slowed to the weakest pace in a year during the third quarter. Growth in service industries cooled and factory production stalled in the in the three months through to September as UK gross domestic product rose 0.7% despite initial forecasts of a 0.8% increase. However, according to the report from the Office of National Statistics, the annual pace of growth was 3.2% from this stage last year, which is the most since 2004, although according to reports from the Bank of England the economy is slowing.

The Euro rose to a fresh record high against the Dollar yesterday, peaking at 1.4873 before closing 0.1% lower at 1.4840 amid another round of positive economic reports, which showed that German consumer spending rose 0.5% in the third quarter. Despite a strong currency and the inevitable impact on export growth, the German economy continues to expand as companies and consumers increase spending and corporate investment. Europe's largest economy has expanded in the fastest pace since 2000 but there are signs that growth is slowing after the collapse of the subprime mortgage market and the subsequent upward pressure on credit costs. However, the European Central Bank has retained a staunchly hawkish stance on monetary policy as inflationary pressures continue to mount following the upward swing in commodity prices. A separate report yesterday showed that German import prices increased by the most in almost a year in October, led by the overwhelming increase in oil prices over the same period.

Data Released 23rd November

EU 09:00 Current Account (October)

EU 10:00 Industrial Orders (September)

written by Adam Solomon

The renewed weakness in Sterling continued to dominate the market yesterday as the UK currency plummeted to the lowest level in four years versus the Euro following reports that Bank of England policy makers voted 7-2 to keep UK interest rates unchanged this month.

The majority of the nine-strong committee agreed that further evidence was needed before a potential reduction in rates but David Blanchflower was joined by Deputy Governor, John Gieve, in arguing for the first cut in more than two years.

Over the past month, UK consumer prices have risen back above the Bank's 2.0% target and record high oil and commodity prices may stoke the already persistent
inflationary concerns.

Nevertheless, the tone and language used in the report suggests that the Central Bank could lower the benchmark lending rate as early as next month amid renewed uncertainty surrounding financial markets.

The collapse of the U.S subprime mortgage market led to a run on the fifth biggest UK mortgage lender, Northern Rock plc and a crisis in credit will inevitably lead to drop in consumer spending.

In a statement last week, Mervyn King acknowledged that growth in the UK economy is poised to slow significantly over the next year while the Bank of England's quarterly inflation report indicated that there will at least one rate cut in 2008.

The positive sentiment surrounding the Euro has seen the single currency appreciate 11% against the Dollar over the past three months alone as the staunchly hawkish stance of the ECB combined with the remarkable resilience of the European economy has contrasted perfectly to the deterioration of U.S economic growth.

The Euro's unprecedented rise against the Dollar will be cause for concern to policy makers as overseas demand dwindles and the economy slows.

Nevertheless, a spate of recent hawkish statements from a number of ECB officials has focused on higher inflationary concerns rather that the probable impact on the economy.

With oil prices rising towards $100 a barrel, producer price inflation will inevitably keep the ECB from lowering interest rates in the near-to-medium term.

The recent pattern of market movement has been compared to the volatility we saw in August where the Federal Reserve shocked the market by reducing the discount lending rate after raising borrowing costs aggressively over the past two years.

Two year bond yields fell below 3% yesterday to close at the lowest level in nearly 3-years as traders become increasingly concerned about the fate of the U.S economy.

The Dollar came under further pressure against both the Euro and the Pound yesterday following comments from the U.S Treasury Secretary, Hank Paulson, who said that home loan defaults should be substantially greater next year.

In terms of economic data, an index of leading economic indicators showed that the economy is forecast to slow significantly in 2008 as the Conference Board's index fell 0.5% in October following a 0.1% gain the previous month.

Elsewhere, first time jobless claims and the Michigan sentiment survey were both better than expected but were both at levels consistent with slowing economic growth.

The Dollar may come under further pressure today as the Thanksgiving holiday leaves the U.S currency susceptible to further losses against most of the 16 most actively traded currencies.

Data Released 22nd November

EU 09:00 Current Account (October)

EU 10:00 Industrial Orders (September)

written by Adam Solomon

The Pound unexpectedly performed very well against the majors yesterday, rising back above 2.0600 versus the Dollar and briefly trading above 1.4000 against the Euro as we build up to the release of the minutes from the Bank of England's last policy meeting.

The overwhelming decline in Sterling sentiment has seen the UK currency fall to the lowest level in nearly three years versus the Euro amid increased speculation that the Central Bank will begin cutting interest rates next month in accordance with slowing economic growth.

The monetary policy committee collectively voted to hold interest rates steady at 5.75% this month and the report this morning will provide an insight into how the panel voted and the chances of a surprise rate cut in December.

The Pound may come under significant pressure if more than one policy maker has joined David Blanchflower in recommending a quarter-point reduction in the benchmark lending rate.

The governor of the Bank of England, Mervyn King, released the Bank's quarterly inflation report last week where he seemed to be more concerned about growth in the economy than the upside risks to inflation and that may prove pivotal in the timing of the next move in UK interest rates.

The unrelenting rise of the Euro saw the single currency approach the coveted 1.5000 level versus the ailing U.S Dollar and this morning we have consolidated well under 1.4000 versus the Pound despite the lack of fundamental data released in the Euro-zone.

Traditionally, the U.S Thanksgiving Holiday is a quiet week in the market but the sharp volatility this year suggests that the Euro may indeed breach 1.5000 and rise to the strongest level on record.

In recent weeks the ECB have adopted a staunchly hawkish stance on monetary policy and have seemed unperturbed with the current strength of the Euro despite the likely impact on the economy.

However, comments from ECB official, Junker, does suggest that the Central Bank are starting to worry about the current exchange rate despite rising oil prices stoking the already persistent inflationary concerns.

The overwhelming and rapid decline of the Dollar saw the U.S currency make further losses versus the Euro yesterday and also trade lower against almost all of the 16 most actively traded currencies following reports that U.S housing starts fell to a 14-year low in October.

Home building permits slumped to the lowest level since 1993 while builders broke ground on a larger number of new homes that expected but the worst slump in housing for 17-years has yet to show signs of peaking.

Building permits fell 6.6% to an annual pace of 1.178 million, the fifth consecutive monthly decline, despite an unexpected jump in housing starts.

The focus yesterday inevitably fell on the FOMC minutes last night where Fed forecasts showed that risks to growth are skewed to the downside and therefore a further quarter-point rate cut may be necessary next month.

However, the U.S Dollar has continued to decline against the majors and the unrelenting weakness in the currency is causing concern amongst countries who hold Dollar denominated assets.

China and the Gulf nations have complained that their investments into U.S assets are falling while global inflation is rising and if the Dollar continues to lose value then there will come a point where the losses become intolerable.

Data Released 21st November

UK 09:30 BoE MPC Minutes (October)

U.S 13:30 Initial Jobless Claims (w/e 17th November)

U.S 15:00 Leading Indicators (October)

U.S 15:00 Michigan Sentiment (November Final)

written by Adam Solomon

The renewed weakness in the Pound continued yesterday as the UK currency declined against all but one of the 16 most actively traded currencies following reports that UK house prices dropped in every region of the country except London.

The average cost of a home dropped 0.7% this month and the report from Rightmove plc showed that sellers should continue to reduce prices because a more protracted slowdown is likely over the coming months.

UK home values have risen 7.9% from this stage last year, the smallest increase in 17-months, and the report coincides with a forecast from Nationwide Building Society last week that house prices will stagnate for the first time in a decade.

The governor of the Bank of England has also voiced concerns that there are signs the UK property market looks "particularly weak" after the MPC raised interest rates five times in a year and bank's tightened lending.

Although the Pound continued to downward momentum against the Dollar yesterday, the daily losses are becoming limited and therefore a technical bounce is likely in the near-term, especially given the 'spike bottom' on Friday.

The Pound traded as low as 2.0380 last week amid increased speculation of an impending rate cut by the Bank of England and deteriorating UK fundamentals.

The Euro rose to yet another record high versus the Dollar last night and also extended the gains made against the Pound amid hawkish commentary from ECB officials, including the chairman Jean-Claude Trichet, who insisted that the possibility of slowing growth is offset with the medium terms risks to price stability.

That sentiment will probably be echoed in a report this morning where German producer prices are expected to portray an upswing in factory-gate inflation.

The Dollar fell to the lowest level on record against the Euro yesterday and declined against all but three of the most actively traded currencies on speculation that U.S housing starts will show a deepening housing recession that threatens to curtail the pace of economic expansion.

Builders may have started work on just 1.17 million homes last month, down 1.8% from September and the lowest amount in 14-years as the construction slump shows few signs of abating.

Home sales throughout the U.S are dropping and potential buyers are waiting for values to fall even more while some institutions have tightened lending conditions in the wake of the crisis surrounding the U.S subprime mortgage market.

Sales of previously owned homes fell in September to the lowest level since records began in 1999 while new home sales plummeted to an 11-year low.

The report this afternoon may weigh heavily on Dollar sentiment and force the Federal Reserve to lower interest rates for the third month in a row in order to provide some relief to the housing market.

Therefore, the focus today will also fall on the minutes from the last FOMC rate announcement may policy makers may provide an indication of the probability of further monetary easing next month.

Data Released 20th November

UK 09:30 PSNCR (October)

UK 11:00 CBI Monthly Trends (November)

U.S 13:30 Housing Starts (October)

U.S 19:00 FOMC Minutes

written by Adam Solomon

Following on from last week, the Pound extended its losses versus the majors on Friday, dropping back towards 2.0400 against the Dollar and consolidating under 1.4000 versus the Euro following a dismal report on UK consumer spending.

Retail sales unexpectedly declined for the first time in nine months in October as concerns over a renewed credit crunch coupled with higher interest rates dampened confidence.

Despite the jobless rate falling to the lowest level in almost 2-years, sales contracted 0.1% from the previous month amid higher food and fuel costs that will undoubtedly weigh on sentiment in the months ahead.

The report highlights the Bank of England's concerns that downside risks to economic growth are becoming increasingly apparent and that has fuelled speculation of an imminent interest rate cut.

With the distinct lack of economic data released this week, sentiment towards riskier 'high-yielding' assets is likely to remain the dominate force in financial markets.

Following reports last week that Barclays plc had suffered huge losses related to the U.S subprime mortgage crisis, markets will be paying particular attention to any reports about the impact of the credit crunch.

The unrelenting upward momentum surrounding the Euro appears to be running out of steam as the single currency again failed to react to positive economic data and hawkish commentary from the European Central Bank.

The Euro has risen to the highest level on record against the U.S Dollar in recent weeks and also rallied to a fresh 2 1/2 year high versus the Pound as the ECB continued to stoke speculation of a further interest rate increase.

Recent reports of an upward swing in the annualised pace of inflation has seen the ECB take a staunchly hawkish stance on price stability while refusing to acknowledge the possible impact of a strong Euro.

However, with commodity prices rising to new record highs, a strong currency suits Europe but the likely impact on export growth will be cause for concern in the months ahead.

The recent appetite for the U.S Dollar may only be a result of broad Sterling weakness and not necessarily a reflection of the renewed optimism in the economy as reports last week showed that consumer prices remained unchanged while industrial production unexpectedly declined.

A decline in sales prompted factories to slow production with output dropping 0.5% in the month of October, the biggest fall since January as the biggest housing slump in 17-years begins to filter through to other industries.

The Federal Reserve have slashed interest rates by 75 basis points in just two months and the Dollar may come under further pressure amid renewed speculation of a further cut in December.

Renewed weakness in the housing market combined with fresh volatility in the financial sector may prompt policy makers to lower the benchmark lending rate and therefore the focus this week will fall on the minutes from the last FOMC meeting.

Data Released 19th November

U.S 18:00 NAHB Housing Market Index (November)

written by Adam Solomon

The recent negative sentiment surrounding the Pound continued yesterday as the UK currency plummeted to a fresh 2 1/2 year low against the Euro following the release of the Bank of England's quarterly inflation report.

The tone and language used in the statement seemed to suggest that the Central Bank will cut interest rates at least once in 2008 in order to prevent an economic slowdown without fanning inflation.

Consumer prices rose back above the Bank's 2.0% target in October and to the highest level in four months following widespread increases in food costs and oil prices. In the report yesterday, the BoE said that the inflation rate will rise above the target next year before settling back towards 2.0% in 2009.

The UK economy is slowing from the fastest pace of expansion in 3-years as house prices continue to fall and service industries expand at the slowest pace in nearly 5-years.

The crisis in credit markets has led to a run on the fifth biggest UK mortgage lender while Barclays reported losses of up to £1.3 billion after contagion from the U.S subprime mortgage slump spread.

As a result, the Pound has fallen back towards the support at 2.0470 versus the Dollar after peaking above 2.1000 just last week. In addition, the UK currency is poised to drop under the 1.4000 level against the Euro despite separate reports that UK unemployment fell to the lowest in nearly 3-years last month.

Jobless claims dropped 9,900 from September, the least since February 2005, as a strong labour market may support the economy and boost consumer spending.

The Dollar made gains against the Pound for a second consecutive session yesterday and also push back under 1.4700 versus the Euro despite reports that U.S retail sales increased by less than anticipated in October.

Sales increased just 0.2% following a revised 0.7% gain in September as rising fuel costs and falling home values sapped consumer sentiment.

The Dollar came under further pressure against most of the higher-yielding currencies yesterday as a separate report showed that U.S producer prices rose at a slower pace than forecast in October.

Prices paid to U.S producers increased 0.1% following a 1.1% gain in September while core prices remained unchanged, which suggests that the economy is weathering the impacts of higher energy costs.

The focus today will fall on the U.S consumer price index, which provides a broader of inflation and is expected to show that prices rose 0.3% in October and reflect the unrelenting rise in oil prices.

Data Released 15th November

UK 09:30 Retail Sales (October)

EU 09:00 ECB Monthly Bulletin

EU 10:00 Final HICP (September)

U.S 13:30 Consumer Price Index (October)

U.S 13:30 Initial Jobless Claims (w/e 10th November)

U.S 13:30 Empire State Index (November)

U.S 17:0 Philly Fed Index (November)

written by Adam Solomon

Following the overwhelming decline of Sterling on Monday, the UK currency managed to rebound modestly against the Dollar yesterday and also stemmed the losses versus the Euro following reports that UK inflation unexpectedly rose in October.

Consumer prices climbed above the Bank of England's 2.0% target and to the highest level since June following an increase of just 1.8% in September. The report will
diminish the prospect of an interest rate cut in the near-term and suggests that the highest benchmark lending rate in six years has yet to rid price pressures out of the economy.

The fastest increase in food costs since 1993 combined with oil prices rising to the highest level ever recorded will see manufacturers pass on high costs to consumers and force the BoE to hold interest rates steady over the coming months as policy makers gauge the damage to economic from U.S subprime mortgage losses.

Nevertheless, the Pound failed to make any significant gains against the majors as the Royal Institute of Chartered Surveyors reported that UK house prices had fallen to the lowest level in two years.

Five interest rate increased in a year combined with a jump in credit costs is curbing demand for homes with rising mortgage rate deterring buyers.

The focus this morning will fall on the Bank of England inflation report and following the surprising increase in consumer and producer prices over the past month, the tone of the report will probably lean towards the upside risks to price stability.

The Euro consolidated under the trend support at 1.4225 versus the Pound last night and also remained largely unchanged against the Dollar despite reports in Germany that investor confidence had dropped to the lowest level in nearly 15-years in November.

The Zew index of investor and analyst expectations fell to a reading of minus 32.5 this month and to the lowest level since February 1993 after the Euro reached a record high against the Dollar and the price of oil nearly breached $100 a barrel.

The overwhelming decline in sentiment will fuel speculation that growth in Europe's premier economy will slow over the coming year following the fastest pace of expansion in seven years.

The Euro has appreciated by an incredible 8% versus the Dollar in the past three months alone and the subsequent impact on German exports will sap overseas demand.

However, the ECB are unlikely to lower interest rates in the near-term as persistent inflationary concerns will weigh on consumer spending and raise the possibility of further monetary tightening.

The renewed weakness in the Dollar has seen the U.S currency plummet to the lowest level in nearly 30-years versus the Pound amid speculation that the Federal Reserve will lower interest rates again before the turn of the year.

The increased sense of volatility over the past few trading sessions does not necessarily represent a shift in attitude towards the Dollar but more likely a result of the sharp moves in U.S equity markets and carry trades.

However, the Dollar did find some support yesterday as pending homes sales unexpectedly rose 0.2% in September instead of the 2.5% drop anticipated with the worst slump in housing for over 17-years showing few signs of abating.

The Dollar may struggle against the majors today as we build up to the release of the retail report this afternoon where sales in the U.S probably rose at a slower pace in October as falling home values and rising fuel prices begins to curb consumer spending.

Data Released 14th November

UK 09:30 BoE Inflation Report (October)

UK 09:30 Average Earnings (3 months to September)

UK 09:30 Claimant Count / Unemployment Rate (October)

EU 10:00 Flash GDP (Q3)

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

U.S 13:30 Retail Sales (October)

U.S 15:00 Business Inventories (September)

written by Adam Solomon

The Pound declined considerably against the majors yesterday, dropping through the support at 1.4220 versus the Euro and closing well under 2.0700 versus the Dollar despite reports that UK producer prices rose at the fastest annual pace in 12-years.

So called factory-gate inflation rose 3.8% year-on-year in October following a 2.8% increase the previous month as manufacturers passed on record high oil prices.

In the aftermath of the report, the Pound continued to downward momentum against almost all of the 16 most actively traded currencies as rising fuel costs will only add to the persistent inflationary concerns facing the Bank of England.

The Monetary Policy Committee will probably keep UK interest rates on hold for the foreseeable future as a slowing economy will be offset with higher inflation.

Recent reports have indicated that the pace of growth in the manufacturing and service industries contracted for the first time last month while a separate index of the UK housing market showed that prices dropped to the lowest level in over two years.

The focus this morning will undoubtedly fall on the October consumer price index where the broader measure of inflation is expected to show that prices increased to an annual pace of 1.9%.

The Dollar plummeted to the lowest level in almost 30 years versus the Pound last week and also fell to a record low against the Euro as the Federal Reserve lowered interest rates by 75 basis points in just two months.

Nevertheless, the Dollar staged a remarkable rally against the Pound, dropping back towards 2.0600 by the close of trading last night while also snapping a five-day losing streak versus the Euro despite the lack of U.S economic data released.

The positive sentiment surrounding the Euro saw the single currency break out of the tight trading range versus the Pound and accelerate to the strongest level in over two years amid speculation of a European rate hike over the coming months.

The European Central Bank have adopted a staunchly hawkish stance over the past month despite the Euro's unrelenting rise against the Dollar and the subsequent impact on the economy.

Economic growth in the Euro-region has accelerated at the fastest pace in seven years and that is largely due to demand from overseas for European based goods.

Therefore, a strong Euro should be cause for concern but the tone and language used in a statement from the ECB President, Jean-Claude Trichet, last week seemed to suggest that policy makers are unperturbed with the current strength of the Euro and more concerned with rising inflation.

Data Released 13th November

UK 09:30 CPI Inflation Report (October)

GER 10:00 ZEW Index (November)

EU 10:00 Industrial Production (September)

U.S 20:00 Pending Home Sales (September)

written by Adam Solomon

Following on from last week, the positive sentiment surrounding the Pound saw the UK currency rally to a fresh record high against the Dollar before reports on Friday that shares in Barclays plc were temporarily suspended after the stock price fell by 9.1%.

As a result, the Pound declined heavily against all 16 of the most actively traded currencies and by the close of trading on Friday, the UK currency was approaching the 2-year low at 1.4225 versus the Euro.

The increased sense of volatility surrounding credit markets sent shares in the UK's third biggest mortgage lender plummeting and that will only heighten concerns that a further crisis in credit looms.

Elsewhere, the Pound snapped a seven day winning streak against the Dollar amid reports that the U.K trade deficit had widened to a record level in September as exports to countries outside the EU stalled.

The gap in trade was £7.8 billion, the most since records began in 1697, compared with just £6.9 billion the previous month as a strong Pound and slowing economic growth cooled demand for British made goods.

The focus this week will inevitably fall on the tone of the Bank of England's inflation report on Tuesday where consumer prices are expected to rise to 1.9% year-on-year in October from 1.8% the previous month.

The unrelenting rise of the Euro saw the single currency rocket to the highest level on record against the Dollar while further gains look likely amid diverging interest rate expectations between Europe and the U.S.

Last week, the European Central Bank, led by the chairman, Jean-Claude Trichet, elected to keep the benchmark lending rate on hold at 4.0% as inflation shows signs of accelerating while demand from emerging markets in China and Russia sent exports higher.

The hawkish stance in the accompanying press conference seemed to suggest that policy makers are more concerned with tackling inflation than the possible threat of a slowing economy.

Consumer price inflation is currently at the highest level in 2-years while a strong Euro is helping cushion the blow of oil prices reaching the highest level ever recorded.

The spotlight this week will remain on oil prices, which continue to threaten the $100 barrier as OPEC refuses to increase production while no change in output levels is expected.

The recent negative sentiment surrounding the Dollar continued on Friday as the U.S currency fell to fresh record low against the Euro but took advantage of broad Sterling weakness following reports that the U.S trade deficit unexpectedly narrowed in September.

The gap in goods and services shrank by 0.6% to the lowest level since May 2005 as a weak Dollar combined with the strongest pace of global expansion in nearly 30-years increased overseas demand for U.S made goods.

Export growth has reached a record level for the past seven consecutive months, which represents the longest surge since 2000 and may offset the worsening housing recession that is weighing heavily on consumer sentiment.

The preliminary estimate of the University of Michigan sentiment index showed that confidence among U.S consumers fell to the lowest level in two years this month amid rising fuel prices and falling home values.

The report on Friday will only raise concerns that consumer spending, which accounts for over two thirds of economic growth, may continue to weaken over the coming months and force the Federal Reserve to lower interest rates further.

Data Released 12th November

UK 09:30 CIPS Services PMI (October)

U.K 09:30 Industrial Production (October)

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

written by Adam Solomon

The Pound rose to yet another 26-year high versus the Dollar last night and also remained largely unchanged against the Euro despite a softer report on UK house prices and an uneventful Bank of England rate announcement.

The monetary policy committee, led by the governor, Mervyn King, kept its benchmark interest rate unchanged at the highest level in six years as policy makers resisted calls for a rate cut.

The nine-strong committee decided to leave rates on hold as oil prices continue to advance to within a whisker of $100 a barrel and rising commodity prices will undoubtedly fan inflation.

Therefore, most economists seem to think that the Bank of England will lower rates in the first quarter of 2008 while the decision yesterday suggests that policy makers are more concerned with the impact of the U.S subprime mortgage slump, which led to a crisis in credit that saw a run on Northern Rock plc.

The renewed concerns over a U.S recession will probably mean that an economic slowdown will become more apparent early next year and that's when the Bank of England are likely to initiate a rate cut.

The strength of the Pound against the Dollar seems to be derived from the overall demand for higher yielding currencies and a drop in appetite for the U.S currency.

The UK's benchmark interest rates is the highest among the Group of Seven industrialised nations while the Federal Reserve has lowered borrowing costs by 75 basis points since September.

The Euro rose to the highest level ever recorded against the Dollar yesterday and looks certain to test the 1.5000 level over the weeks despite the ECB's decision to keep interest rates unchanged at 4.0%.

Nevertheless, the economic picture looks healthy with German trade data hitting a six-month high in September as exports to emerging markets in China and Russia is offsetting softer demand from the U.S.

In addition, the tone and language used in Trichet's opening statement yesterday seemed to suggest that the ECB's governing council are more concerned with rising inflation than slowing economic growth.

Consumer prices are currently at the highest level in two years while a strong Euro is helping offset rising inflationary pressures as the price of oil continues to hover around $100 a barrel. The chairman of the Central Bank, Jean-Claude Trichet, indicated yesterday that the ECB are concerned with the Euro's advance and the current level of inflation.

The overwhelming decline of the Dollar continued yesterday as the U.S currency fell against 11 out of the 16 most actively traded currencies with traders raising bets that the Federal Reserve will lower interest rates for the third consecutive month in December.

The Fed have the unenviable task of bolstering U.S economic growth and monitoring core inflation amid rising commodity prices. The Dollar has fallen to a record low against the Euro and to the weakest level in nearly 30-years versus the Pound before a report this afternoon, which may show that U.S consumer sentiment is the worst since May 2006.

In addition, the Dollar may struggle to bounce back as the U.S trade balance is expected to show that the deficit in goods and services actually widened in September.

The gap in trade probably increased from the lowest level in seven months as the price of imported oil jumped to a record level, even as a weak Dollar spurs demand from overseas.

Data Released 9th November

UK 09:30 Trade Balance (September)

U.S 13:30 Export Prices (October)

Import Prices

U.S 13:30 Trade Balance (September)

U.S 15:00 Michigan Sentiment (November Prelim)

written by Adam Solomon

The Pound's dramatic appreciation against the Dollar showed no signs of slowing yesterday as the UK currency rose above 2.1000 during the U.S trading session and to the highest level in 26-years.

In terms of economic data, the Pound found some support as the UK shop price index for the month of October showed persistent inflationary concerns that could keep the Bank of England from lowering interest rates in the short-term.

In addition, the Pound stood firm this morning when an earlier report from HBOS plc showed that UK house prices fell for a second month in October as the credit crunch in August combined with higher interest rates diminished confidence.

The average cost of a home in the UK fell 0.5% last month following a slightly greater drop in September according to the report from the UK's biggest mortgage lender.

The focus today will undoubtedly fall on the Bank of England interest rate announcement this lunchtime where the MPC are largely expected to hold rates unchanged at 5.75%.

However, with house prices falling on a month-to-month basis and inflation still holding under the 2.0% threshold, the nine-strong committee may be divided in their decision to leave rates steady.

The Euro's unrelenting rise against the Dollar continued yesterday as the single currency rallied to a fresh record high and looks set to reach the 1.5000 level over the coming weeks.

However, the strength of the single currency will be largely dependent on the tone and language used in the accompanying statement this afternoon where the chairman of the Central Bank, Jean-Claude Trichet, may retain a hawkish stance on inflation.

The governing council are expected to leave European interest rates unchanged at 4.0% this month but with oil prices hovering just under $100 a barrel and consumer price inflation at the highest level in two years, the accompanying statement will probably focus on the inherent risks to price stability.

The current level of volatility surrounding commodity markets has seen oil prices rise to a record level and this may be the sole reason why the ECB and the rest of Europe seem unconcerned with the current strength of the Euro and the impact on overseas demand.

The considerable decline of the Dollar shows few sings of abating as the U.S currency fell to yet another record low against the Euro and also made losses against all 16 of the most actively traded currencies by the close of trading last night.

The underlying weakness in the Dollar can be partially attributed to the diversifying interest rate expectations between the U.S and other G7 nations.

The Federal Reserve have lowered rate by 75 basis points in the past two months alone and a further rate cut may be necessary to provide some relief to the banking system that is still susceptible to subprime mortgage losses.

However, some members of the Federal Open Market Committee seem unconcerned with the current level of the Dollar with Fed President Lockhart saying that the decline in the U.S currency was "manageable".

The Fed must consider that a weak Dollar combined with rising oil prices will have a sharp impact on inflation that may keep the committee from lowering interest rates beyond 4.50%.

Data Released 8th November

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 3d November)

written by Adam Solomon

The Pound drove higher against the ailing U.S Dollar yesterday and traded at a fresh 26-year high overnight, although the UK currency lost further ground versus the Euro amid reports that both the GDP estimate and the BRC retail sales monitor were weaker than the previous month.

In addition, the governor of the Bank of England, Mervyn King, gave an interview to Radio 4 and said that it may take months before commercial banks realise the extent of their losses following the collapse of the U.S subprime mortgage market.

The tone and language used in the statement did also suggest that Bank's were repairing the damage and that "things have improved significantly since the crisis in credit markets over the summer".

The dramatic rise in borrowing costs has led to some banks, including Citigroup Inc to report losses of up to $20 billion while the fallout from a heavy increase in U.S subprime mortgage defaults led to a run on the UK's fifth biggest lender, Northern Rock plc.

Nevertheless, the Pound is still likely to rally higher against the Dollar and continue to achieve multi-decade highs because the inherent weakness surrounding the U.S currency has overshadowed a host of weak economic reports and speculation of a UK rate cut early next year.

As a result, Dollar buyers would be well positioned to implement a working stop order in the market to protect against a sudden downward move.

The renewed weakness in the Dollar saw the U.S currency fall against all of the 16 most actively traded currencies yesterday, plummeting to the lowest level since June 1981 versus the Pound amid reports that Chinese officials plan to diversify $1.43 trillion of reserves in response to a weakening currency.

The vice chairman of China's National People's Congress, Cheng Siwei, told a conference in Beijing that the Dollar is "losing its status as the world currency".

Chinese investors have so far reduced their holdings of U.S treasuries by 5% in the five months through August and the Dollar may continue to decline amid speculation of further rate cuts to come.

The dramatic appreciation of the Euro continued yesterday as the single currency smashed through another record high against the Dollar and slowly inched towards the psychologically important 1.5000 level.

The positive sentiment surrounding the Euro continued as broad Dollar weakness combined with reports that so called factory-gate inflation had accelerated last month.

Persistent inflationary concerns and oil prices rising to within a whisker of $100 a barrel has forced the ECB to retain a tightening bias with consumer prices rising above the 2.0% target for the first time in two years.

In addition, the Purchasing Managers' index of European service industries showed that growth in the sector slowed by more than expected in October. The European Central Bank are likely to leave interest rates unchanged tomorrow but the tone and language used in the accompanying statement may prompt further speculation of a rate increase and propel the Euro higher against both the Dollar and the Pound.

Considering the instability surrounding equity markets at present, the chairman of the ECB, Jean-Claude Trichet, may have taken steps to lower interest rates in order to provide some relief to the banking system.

However, commodity prices have jumped higher and oil closed above $98 last night, which will only exacerbate inflation in the months to come and that will keep the ECB from lowering borrowing costs.

Data Released 7th November

GER 11:00 Industrial Production (September)

U.S 13:30 Labour Costs (Q3)

- Productivity

U.S 15:00 Wholesale Inventories (September)

written by Adam Solomon

The Pound snapped a seven day winning streak against the Dollar yesterday while also remaining largely unchanged versus the Euro following yet another round of poor economic data as growth in UK service industries grew at the slowest pace in nearly five-years.

An index of services fell to a reading of 53.1 in October from 56.7 the previous month, which has heightened concerns that the UK economy is poised to slow in 2008 amid five consecutive rate increases and a jump in corporate credit costs.

UK service industries account for three-quarters of GDP and has propelled the economy to the fastest pace of expansion in three-years. Therefore, the Pound may struggle to make gains against the majors amid further speculation that the Bank of England will cut interest rates early next year.

Elsewhere, a separate report from the Office of National Statistics showed that factory production fell 0.6% in October and to the lowest level in seven months as the Pound's rise to a 26-year high against the Dollar cooled overseas demand.

In addition, with oil prices rapidly approaching $100 a barrel, manufacturing is beginning to weaken as companies are forced to endure higher prices while their goods become more expensive.

The reports yesterday will only serve to increase speculation that the Bank of England will need to lower UK interest rates in the first quarter of 2008.

The dramatic appreciation of the Euro has seen the currency rise to the highest level on record against the Dollar while also rallying to a 2-year high versus the Pound as the ECB continues to retain a tightening bias despite concerns over a global credit crunch.

The chairman of the Central Bank, Jean-Claude Trichet, has the unenviable task of picking sides amongst a divided governing council with policy makers expected to leave the benchmark interest rate unchanged this Thursday.

The recent turmoil surrounding financial markets may force the ECB to abandon plans to continue raising interest rates despite consumer price inflation rising to the highest level in two years.

The focus this morning will fall on the Purchasing Managers' index for European service industries with growth expected to accelerate in October amid a significant rise in consumer spending. Elsewhere, the September producer price index may show that factory-gate inflation increased by 0.3% from August and to an annual rate of 2.6%.

The Dollar managed to stem any further losses versus the Pound yesterday and also remained virtually unchanged against the Euro amid reports that growth in U.S service industries unexpectedly accelerated in October.

The ISM index on non-manufacturing businesses, which make nearly 90% of the economy, rose to a reading of 55.8 from 54.8 in September with a figure above 50 indicating expansion.

A strong labour market has encouraged Americans to increase spending while improvements in business investment and exports have helped maintain the six-year economic expansion even as the housing recession continues to take hold.

However, the Institute of Supply Management released a separate factory index, which showed that production had contracted as manufacturers received the fewest orders in seven months.

Forecasts for U.S economic growth have been scaled back since a big jump in subprime mortgage defaults caused massive volatility in global credit costs.

Data Released 6th November

EU 09:00 Services PMI (September)

EU 10:00 Retail Sales (September)

written by Adam Solomon

Following in from last week, the dramatic and unrelenting decline of the Dollar saw the U.S currency plummet to a fresh 26-year low against the Pound while also testing record lows at 1.4500 versus the Euro following the Fed's decision to lower interest rates to 4.50%.

Although the outcome of the FOMC meeting was largely factored into the market, the accompanying statement didn't provide any clear insight into future policy as policy makers chose to acknowledge that rising commodity prices are having a profound impact on inflation.

Over the past week, the price of oil has surged to the highest level on record as escalating tensions between the U.S and Iran sent prices hurtling towards $100 a barrel.

The Dollar sank to a fresh multi-decade low against the Pound on Friday despite reports that the economy had added almost twice as many jobs as expected in October.

Non Farm payrolls increased by 166,000 jobs after an increase of 96,000 in September as the resilience in the labour market is helping steer the economy away from recession amid a worsening housing slump and record oil prices.

The recent turmoil surrounding financial markets may intensify this week and that could provide some support to the ailing U.S currency as growing concerns over a second credit crunch may see traders return to the Dollar.

The diverging interest rate expectations between Europe and the U.S has sent the Euro to the highest level on record against the Dollar as consumer price inflation in the Euro-zone is accelerating at the fastest pace in two years.

Despite softer-than-expected reports on manufacturing growth in Germany and Italy, a staunchly hawkish statement from the French Secretary of State sent the Euro higher against both the Pound and the Dollar on Friday.

The recent appreciation of the Euro has drawn vocal opposition, particularly from the French, but the Secretary of State maintained that they are resolving their arguments with the ECB because a strong currency is helping keep prices under control.

The focus this week will inevitably fall on the ECB interest rate announcement on Thursday where the squabbling governing council will leave borrowing costs unchanged at 4.0%.

The market will be paying particular attention to the tone of the accompanying statement as higher inflation will prevent an imminent cut in rates while weaker economic blocks the increase that was planned two months ago.

The Pound rose for the seventh day in succession against the Dollar on Friday as the UK currency continues to shrug off weakening economic reports, which indicates that the Pound's strength is largely due to an underlying weakness in the Dollar.

The UK economy has enjoyed the fastest pace of expansion since 2004, largely because of growth in the service sector and rising consumer spending.

However, reports this morning showed that UK wage negotiators agreed on the smallest salary increases since September 2006 as the median pay settlement fell to 3.2% in the quarter through October.

Amid an increased sense of instability returning to equity markets over the past week, the primary mandate for both the Bank of England and the ECB will ensure that risks to price stability do not materialise.

Therefore, the nine-strong monetary policy committee are also likely to hold UK interest rates at 5.25% this month following a strong economic performance in the third quarter.

Data Released 5th November

UK 09:30 CIPS Services PMI (October)

UK 09:30 Industrial Production (September)

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

written by Adam Solomon

The unrelenting decline of the Dollar continued yesterday as the U.S currency fell to a fresh 26-year low against the Pound as the reaction following the FOMC statement on Wednesday suggested traders had interpreted the comments as more dovish than hawkish.

The Federal Reserve elected to cut U.S interest rates to 4.50% in October, the second reduction in two months, while the accompanying statement seemed to indicate that policy makers were becoming concerned with rising commodity prices and the potential impact on inflation.

The price of crude oil rose above 96% a barrel yesterday and to the highest level on record as U.S inventories unexpectedly fell and the economy expanded at the fastest pace in more than a year.

In terms of economic data, the Dollar was hampered by reports that growth in U.S manufacturing slowed by more than initial forecasts last month as industrial orders declined and output contracted.

Elsewhere, the personal income and expenditure report showed that consumer spending had rose less than expected for September as falling house prices dimmed confidence.

The focus today will fall squarely on the monthly U.S employment report where a strong increase in payrolls could determine whether the Dollar has hit the bottom.

The market has factored in an increase of 85,000 jobs in October following a gain of 110,000 the previous month although the unexpected increase in the ADP employment report had led to speculation of a bigger increase.

In addition, a drop in weekly jobless claims may show that the economy added a far higher number than anticipated and the Dollar may make gains amid the diminishing prospect of a December rate cut.


Data Released 2nd November

EU 09:00 Manufacturing PMI (October)

U.S 13:30 NonFarm Payrolls (October)

- Unemployment / Average Earnings

U.S 14:00 Factory Orders (September)

written by Adam Solomon

The U.S Dollar plummeted to a new record low against the Euro last night and also fell to a fresh 26-year low versus the Pound after the Federal Reserve cut interest rates by a further 25 basis points in the monthly FOMC rate announcement.

The Dollar had been under constant scrutiny this week amid speculation that the Fed would lower rates by as much as half a percentage point for the second month in succession.

However, Fed Fund Futures had priced in a 98% probability of a quarter-point reduction but the accompanying statement failed to provide any clear indication on future policy. Indeed, the tone and language used in the statement is being interpreted as neutral while leaning towards slightly hawkish as the Fed acknowledged that economic growth had picked up in the third quarter.

The report from the Commerce Department showed that growth in the economy unexpectedly accelerated in the third quarter as a weak Dollar propelled U.S exports while strong consumer spending and business investment supplemented a further plunge in housing.

Despite the blistering pace of growth, Fed policy makers elected to cut the benchmark lending rate to 4.5% and the Futures market is already pricing in a 30% probability of rates falling to 4.0% by turn of the year.

However, the tone of the FOMC statement last night seemed to suggest that policy makers had already done enough to prevent the economy from stalling and that the recent increases in energy and commodity markets could put renewed upward pressure on inflation.

The remarkable appreciation of the Euro saw the single currency briefly touch 1.4500 against the ailing U.S currency and achieve the highest level of exchange on record as European inflation accelerated more than initial forecasts in October.

Considering that the Euro has risen 11% against the Dollar over the past year alone, the European Central Bank seem remarkably unperturbed with the possible implications on the economy and certainly the impact on export demand.

A number of members of the ECB's governing council, including the chairman Jean-Claude Trichet, have taken a staunchly hawkish stance on monetary policy amid concerns that inflationary pressures are rising.

The flash estimate of Euro-zone consumer prices showed that inflation had accelerated faster than initial forecasts in October while confidence in the economy declined. The rate of inflation in the region rose to an annual rate of 2.6% last month from just 2.1% in September as consumer prices rose at the fastest pace in two years.

As a result, the Euro may continue to make gains against the Dollar amid speculation that the ECB will be forced to raise interest rates from the current 4.0% in order to bring inflation back towards the 2.0% target.

The Pound's unrelenting rise against the Dollar took the U.K currency to a fresh multi-decade high last night as the Federal Reserve lowered interest rates for a second consecutive month and UK house prices rose at the fastest pace since June.

The Nationwide index showed that the average cost of a home increased 1.1% in October as prices increased 9.7% from this stage last year. The resilience in the UK property market provides an indication that the issue of supply and demand is cushioning homeowners against the effects of higher interest rates.

The Bank of England have raised the benchmark lending to the highest level in six years while the recent credit crisis is expected to cool the housing market in 2008. The report yesterday is at odds with recent evidence from Hometrack Ltd who said that rising credit costs are bringing the UK housing boom to an end.

Nevertheless, the Pound rose for a fifth straight day against the Dollar and has also touched 1.4400 against the Euro this morning amid speculation that the BoE will keep interest rates on hold for the remainder of the year.

Data Released 1st November

UK 09:30 CIPS Manufacturing PMI (October)

UK 11:00 CBI Distributive Trades Survey (October)

U.S 12:30 Initial Jobless Claims (w/e27th October)

U.S 13:30 Personal Income / Expenditure (September)

- Core PCE

U.S 14:00 ISM Manufacturing (October)

U.S 14:00 Pending Home Sales (September)

written by Adam Solomon