Daily Insight

The Pound tumbled against the Dollar yesterday, touching a fresh five month low against the U.S currency while also snapping three days of consecutive gains versus the Euro following reports that UK consumer confidence fell to the lowest level in 10 months.

As a result, the Pound weakened against 15 out of the 16 most actively traded currencies as the report from the Nationwide Building Society coincided with news that the BRC sales monitor had dropped to the lowest level in 21 months.

Recent economic reports have pointed to slowing growth in the retail sector while concerns over a fresh credit crunch will have a negative impact on sentiment.

Elsewhere, the Pound was left reeling from news that Gordon Brown was left "speechless" when asked yesterday whether he would reappoint Mervyn King as the governor of the Bank of England. King was subject to criticism last year after the Bank failed to react to the crisis at Northern Rock.

Brown's failure to publicly give his backing to King will do little to inspire confidence, particularly as we build up to the Bank of England rate announcement tomorrow.

The outcome of the meeting is finely balanced with the surprising growth in UK service industries prompting speculation that the MPC will refrain from cutting rates this month. However, the report on consumer confidence yesterday will heighten concerns that spending will slow and combined with falling home values, the UK economy is poised for a tough test in the months ahead.

The surprising resilience of the Dollar continued yesterday as the U.S currency continued to make gains against the Pound despite further speculation that the Federal Reserve plan to cut interest rates by half a percentage point in an attempt to ward off a recession.

In terms of economic reports, the Dollar also stood firm as pending home sales plummeted by more than initial forecasts in November with the index falling 2.6% to a reading of 87.6 following a 3.7% gain in October.

The report from the National Association of Realtors signals that further deterioration in the housing sector is likely over the coming months despite rates falling by 1 percentage point since October.

There was an increased sense in instability that swept through financial markets yesterday and despite a mixed bag of economic data, the Euro stood virtually unchanged against the Dollar, while making modest gains versus the Pound.

The positive sentiment surrounding the single currency came despite reports that retail sales fell 1.4% from a year earlier, which represents the sharpest decline in eleven years.

Nevertheless, any Euro losses were short-lived as a separate report in Germany showed that factory orders had increased beyond expectations over the same period. Despite the overwhelming strength of the Euro over the past year, demand from overseas remains strong while growth in the domestic market is causing a rise in manufacturing orders.

The tone of the report and the overall economic outlook in Europe's largest economy is the main reason why the ECB will maintain a hawkish stance on Thursday and keep interest rates unchanged at 4.0%.

The Euro may continue to make gains against Sterling as we build-up to the lunchtime announcement and a host of positive economic reports are expected to show that growth in German retail sales and industrial output accelerated over the same period.

Data Released 9th January

GER 07:00 Retail Sales (November)

GER 11:00 Industrial Production (November)

EU 10:00 Final GDP (Q3)

written by Adam Solomon