Market Report

Yesterday as expected, the Monetary Policy Committee raised interest rates by 25bp to 5%. But the statement released adjacent suggested any lingering doubts about inflationary pressures, and the near-term momentum in demand, had been eased. Our rate view now is that we may see the Bank of England move rates to 5.25% in February, with a significant risk of another rise to 5.5% in May.

Trade data for September showed the headline trade deficit was £6.6bn, down from an upwardly revised £6.9bn in August. There is no UK data or Speaker events today.

However sterling gained ground against a broadly weaker dollar after Chinese central bank governor Zhou Xiaochuan said China will diversify its $1 trillion foreign exchange reserves into currencies and other investment instruments. This is a very significant comment for FX markets and the implications for the USD could be huge. China is the world's largest FX reserve holder and all but a minimal amount are held in USD. If diversification is to take place then the amount of USD that potentially need to be sold is vast, even for a small percentage adjustment.

While there is no US data today, the ECB conference on "How useful are monetary and credit aggregates in the conduct of monetary policy?" continues today and will likely draw market attention, especially at 1.45pm GMT for a panel discussion on "money and monetary policy - a policy makers' view" with Fed Chairman Bernanke, ECB President Trichet, BoJ Deputy Governor Iwata and PBoC Governor Zhou Xiaochuan. Comments from officials are therefore the biggest risk to market adjustment as the week approaches its conclusion.

Have a great day.

DH

Yesterday we saw GBP once again hold firm against the Euro, seems everyone is anticipating a Bank of England interest rate hike to 5 percent. The Bank of England will make its announcement at 12.00 and we look for clues on whether more tightening is likely in 2007.

UK data released on Wednesday highlighted signs of strength in the economy and potential for inflationary pressures. The British Retail Consortium said that shop prices rose at their fastest rate in more than two years in October. This could increase the likelihood of a Bank of England move to 5.25 percent early next year. Also today with have UK trade balance is due today at 9.30 and we predict a slight increase from £6.7bn in August to a deficit of £6.4bn.

The bulk of the week's data flow will be published this afternoon from the US, with the September trade report, October international prices, and the preliminary November Michigan consumer sentiment reading all due for release in addition to the usual weekly initial claims numbers.

US mid-term election - Democrats take control of House & Senate. According to the latest reports, the Democrats have control of the both the House and Senate for the first time in 12 years.

Australian employment was weaker than the market) was looking for, with employment falling by 31,200 jobs vs. mkt expectations for a 7,500 job gain in employment. We were looking for a 10,000 job decline in employment. We think that the fall in employment indicates that the economy is gradually slowing and that the RBA will likely pause on rates for a while.

DH

Sterling remains in a tight range against the Euro so far this week as all eyes are focused on Thursdays Bank of England interest rate decision, Which is widely expected to increase by 25bp's. This seems to have already been priced in to the current rate, so we do not expect any fireworks. After a brief relief rally, we believe the likelihood is the rate will start to retreat.

Overnight Australia raise their benchmark rate to 6.25 in a widely expected move and the lack of movement in the AUD as a result further highlights our view that GBP is unlikely to benefit any further from the rate hike impetus.

The USD woes that we have seen this week on the back of US mid term elections should begin to ease from here and although it looks like the Republicans have lost the House they look set to retain the Senate. Political uncertainty is never positive for a currency however the economy, though slowed, is still strong and any reduction in Bush's ability to push through legislation is likely to be current account positive for the US.

Our views haven't changed.

VC

Yesterday we saw Sterling hit one-week lows against the Euro and the dollar after UK Industrial Production data showed that the British manufacturing sector failed to expand in September, casting doubts over whether rate hikes will continue into 2007.

Against the dollar, GBP losses were accentuated by growing expectations that the U.S. Federal Reserve is unlikely to cut interest rates in the next few months.

Today we see released from the UK BRC Retail sales monitor for October at 11:00. This is likely to fall to 4.6%, from 5.2% in September.

In the Euro Zone today we have September data for German industrial production and Euro area retail sales. Pretty quiet on the data front today, no real data from the US until Thursday. It seems that everyone is waiting for Thursday to see if thoughts are confirmed and Bank of England hikes to 5%.

China's FX reserves hit USD1trn, according to a China Central Television (CCTV) report.

Once again the wife has contributed to Marks and Spencer as they release pre tax profits of 405.1 Million

Have a great day.

DH

Sterling is expected to rise against the Euro and the USD this week with The Bank of England expected to raise interest rates on 9th November by a quarter point, to a five year high level. This is due to accelerating economic growth and the rise of energy costs, forcing up inflation. Some speculators anticipate that there will be further rises by the BOE in to 2007 to curb further inflation. This in not our view! GBP is at very high levels against both USD and EUR and it is our strong opinion that it won't be here for long. GBPUSD has briefly popped its head above 1.90 over the last week, yet these levels offer a great opportunity to sell GBP as the realisation that the UK has its share of problems and the benefits of higher rates and persistent inflation will soon pass.

GBP reached its highest level against the Euro last week since June 2005 following the release of a report by Nationwide showed residential property prices rose in October for an eighth month. The President of the ECB last week signalled the bank will raise interest rates in December to keep control of inflation, following lower oil prices which lead to increased spending across Europe.

The Dollar's rise against sterling and the Euro, following Friday's release of data, showed higher than expected solid US jobs growth, with US firms adding 470,000 jobs between August and October, that removed previous negative sentiment towards the US and will continue to benefit the USD. The Fed's Moskow, Sandra Pianalto Janet Yellen will speak today and the market anticipates that they will highlight the risk of faster inflation in the US, following a Nov 3 government report showed unemployment has fallen to a five year low last month.

Our editorial will highlight our views about GBP further and the opportunities that current levels provide.

MA

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