Daily Insight

The Pound fell to a fresh record low against the Euro last night and to the lowest level in nearly a year versus the Dollar despite the Bank of England's decision to leave UK interest rates unchanged at 5.50%.

In the build up to the monthly announcement there was intense speculation surrounding
a back-to-back rate cut in January but the monetary policy committee elected to assess the effects of last month's reduction before further monetary easing in February.

Tighter credit conditions, weakening consumer spending and a slowing housing market will require that the Central Bank take action in the near term but policy makers must weigh up those risks against rising inflationary pressures with oil breaching $100 a barrel for the first time. Food and energy costs have risen to a record level over the past quarter and the MPC are concerned that the pace of inflation will accelerate well beyond the 2.0% target.

Initially, the Pound made modest gains against the majors but fell to a fresh record low by the close of trading last night amid increased speculation of an impending rate cut in February.

The UK currency declined against all 16 of the most actively traded currencies and the deterioration of economic data combined with the gloomy outlook for the economy is leading many analysts to believe that the Pound will repeat the movements of the Dollar in 2007.

The negative sentiment surrounding the UK currency is likely to continue this morning amid reports that industrial production probably weakened in November following the disappointing manufacturing numbers last week.

Although the U.S currency rose to a nine month high against the Pound yesterday, that was an indication of Sterling weakness rather than Dollar strength and the greenback came under further pressure against the Euro as the Fed chairman, Ben Bernanke, signalled "deeper" rate cuts to come.

The bleak outlook for the U.S economy means that that the FOMC must balance slowing growth against faster inflation and his speech in Washington yesterday, Bernanke fuelled speculation of a 50 basis point cut at the end of this month.

In terms of economic data, the Dollar may decline further this afternoon as the U.S trade deficit is expected to widen for a third consecutive month in November as consumer demand for imported oil rose to the highest level in record.

The Euro rallied against both the Pound and the Dollar yesterday as the European Central Bank left interest rates unchanged at 4.00% and retained a staunchly hawkish stance on the economy and inflation.

The outcome of the meeting was a non-event for the Euro but the tone and language used in the accompanying statement seemed to suggest that policy makers are still looking at the possibility of raising interest rates in the near-to-medium term.

The chairman of the Central Bank, Jean-Claude Trichet, didn't include the term "strong vigilance" in his statement but his commitment to controlling inflation sent the Euro to a record high against the Pound.

A number of members of the ECB's governing council have publicly expressed their concerns over rising inflationary pressures and policy makers seem prepared to act pre-emptively on a rate increase.

With regards the outlook for the Euro-zone economy, Trichet acknowledged that the risks to growth are to the downside but recent economic data remains positive and the strong momentum surrounding the economy will continue.

Data Released 11th January

UK 09:30 Industrial Production (November)

- Manufacturing Output

U.S 13:30 Export Prices (December)

- Import Prices

U.S 13:30 Trade Balance (November)

written by Adam Solomon