Daily Insight

The Pound has endured a torrid time in recent weeks and yesterday was no exception as the UK currency plummeted to a fresh record low against the Euro while consolidating under 1.9600 versus the U.S Dollar.

The unrelenting downside momentum surrounding Sterling is geared towards today's Bank of England interest rate announcement where the monetary policy committee will probably resist calls for a back-to-back interest rate cut in February.

A recent spate of negative economic reports has revived speculation that UK interest rates will fall by another 25 basis points while the derivatives market has priced in a 60% chance of a cut.

Both consumer confidence and a gauge of leading economic indicators deteriorated over the past month while the latest round of housing indices points to slowing growth in the sector.

Nevertheless, trader and analysts alike are split on the outcome of the decision as the Bank of England are likely to hold interest rates at 4.0% this month and await further evidence of the impact from the previous rate cut.

In addition, growth in UK service industries accelerated way beyond initial forecasts and provided an indication that the robust pace of growth in the sector will support the economy in the months ahead.

The heightened sense of anticipation surrounding the rate announcement will see an increased level of volatility in the currency market and we can expect the Pound to rally against the Dollar if the MPC decide to wait until next month.

Elsewhere, the European Central Bank are also due to convene today and announce that interest rates in the 13 nations sharing the Euro will probably remain unchanged at 4.0% as policy makers retain a tightening bias in the wake of rising inflationary pressures.

Record high food and energy costs has sent consumer prices hurtling towards 3.0% year-on-year in November and that has seen the ECB convey a staunchly hawkish stance on monetary policy while the governing council may even raise interest rates this year.

The fallout from the collapse of the U.S subprime mortgage market has heightened concerns of a global economic slowdown that has seen Central Banks in the UK and U.S begin monetary easing.

Nevertheless, growth in the Euro-zone has been robust, particularly in Germany where factory orders and overseas demand have continued to rise despite the overwhelming appreciation of the Euro.

As a result, the ECB has remained focused on tackling the upside risks to price stability and with oil prices breaching the $100 a barrel level over the past month, policy makers may forced into action sooner rather than later.

The bleak outlook for the U.S economy and the negative sentiment surrounding recent economic reports has increased speculation that the Federal Reserve will slash interest rates by a further 50 basis points this month.

However, the resilience of the Dollar in recent sessions has seen the U.S currency rally to a five-month high against the Pound while also holding steady versus the Euro.

The Federal Open Market Committee have lowered U.S interest rates by 1 percentage point since October and yesterday the chairman, Ben Bernanke, came in for some criticism from investors that the Fed had not been aggressive enough in order avert a recession.

The disturbingly weak Nonfarm payrolls report last Friday has heightened concerns and prompted further speculation that policy makers will cut rates by half a percentage point on the 30th January.

Data Released 10th January

UK 12:00 BoE Rate Announcement

UK 09:30 Trade Balance (November)

EU 12:45 ECB Rate Annoucement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 5th January)

U.S 15:00 Wholesale Inventories (November)

written by Adam Solomon