The resilience of the Pound has been a big surprise over the past few trading sessions, particularly since the Bank of England cut interest rates for the first time in two years as falling home values and rising prices weighed heavily on consumer sentiment.
In addition, the impact of the credit crunch led to a run on the fifth biggest mortgage lender, Northern Rock plc, while even Barclays reported huge losses linked to the collapse of the U.S subprime mortgage market.
As a result, the Bank of England took the decision to lower interest rates before the turn of the year and provide some relief to the financial sector while also encouraging consumers to step up spending over the festive period.
Nevertheless, the accompanying statement released by the Central Bank seemed to suggest that the MPC wouldn’t necessarily begin a series of rate cuts over the coming months amid upside risks to inflation.
That sentiment was echoed in a report on UK producer prices yesterday where the so called gauge of ‘factory-gate inflation’ rose at the fastest annual pace since 1991 as companies passed on higher costs for food and oil.
The report yesterday will quash speculation that the BoE intend to reduce interest rates by a whole percentage point over the next year as the housing market cools and growth in the economy slows.
The positive sentiment surrounding the Euro gathered momentum yesterday as the single currency extended its rally for a third consecutive trading session amid a host of strong economic reports and hawkish commentary from ECB officials.
The European Central Bank kept the benchmark lending rate on hold at 4.0% last week but the tone of the accompanying statement seemed suggest that policy makers are still concerned with the upside risks to price stability.
In fact, some members of the governing council were even discussing the possibility of raising interest rates this month as the annualized rate of inflation reached 3.0% in November.
The unrelenting appreciation of the Euro has however caused some concern as the strength of the Euro-zone in economy is very heavily reliant on exports and a strong currency will obviously hamper demand from overseas.
Nevertheless, reports in Germany yesterday showed that export growth actually hit a record high in October following the surprising rise in manufacturing, industrial production and factory orders.
The Dollar has declined against most of the 16 most actively traded currencies this week as the focus switches to the FOMC rate announcement this evening with the Fed expected to lower interest rates for the third consecutive month.
The outcome of the meeting is not in question but the severity of monetary easing this evening will be of particular significance in terms of the general direction for the Dollar over the coming month.
The most likely scenario is that the Fed will cut rates by a further 25 basis points and issue a statement reflecting concerns over slowing economic growth and the deepening housing crisis.
The dovish tone of the accompanying statement would pave the way for further monetary easing next year but that scenario may not necessarily prove negative for the Dollar. There is a minority in the market that anticipate a larger cut this month and will therefore be disappointed if the Fed don’t lower rates by 50 basis points.
Data Released 11th December
UK 09:30 Trade Balance (October)
GER 10:00 ZEW Index (December)
U.S 15:00 Wholesale Inventories (October)
U.S 19:15 FOMC Rate Announcement
written by Adam Solomon
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