Market Report

Our view that further GBP gains are limited was further evidenced yesterday on signs that UK inflation is slowing damping speculation that the Bank of England will continue to raise rates into next year. The pound slid to its three week lows versus the USD. With an early 2007 rate hike priced in the market there may be a large unwinding of long GBP positions in the run up to year end resulting in further declines. These current levels therefore remain attractive to sellers of the pound.

Meanwhile the yen rebounded from a one-week low after the deputy secretary at the U.S. Treasury said he will ask China to allow the Yuan to be more freely traded. Also the South African Rand was the world's biggest mover rising amid speculation the yield advantage of holding assets denominated in the currency will improve.

Today is the start of G20 Meeting of Finance Ministers and Central Bank Governors in Melbourne, Australia, while the markets will be looking at the data from the U.S. in the shape of U.S. Housing Starts for October at 13.30 GMT and a speech from the U.S. Federal Reserve's Pianalto.

Good luck with the Euro lottery tonight and do not forget the Children in Need appeal.

GR

Sterling fell to a 1-1/2-month low against the euro after the Bank of England signalled that interest rates might not need to rise quite as high as markets currently expect.In its quarterly inflation report published a week after it raised its borrowing costs to 5.0 percent, the BoE said CPI inflation would marginally undershoot its 2 percent target in two years if rates follow the market yield curve. The BoE said it believes inflation would peak at around 2.7 percent at the end of this year and then sharply fall back and that the CPI won't get to 3 percent in the next few months.

On the flip side, slowing inflation won't deter the European Central Bank from raising interest rates for a sixth time in the past year, helping push up the euro.

Robert E. Rubin, Treasury secretary under President Bill Clinton, and former Federal Reserve Chairman Paul Volcker said foreign investors probably won't keep increasing dollar holdings, raising the risk of a slump in the currency. Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes.

Canada's dollar was little changed, trading near the lowest in four months, after a report showed factory shipments declined at triple the rate economists expected. Federal Reserve officials were concerned about inflation, though the consensus view emerging from their October meeting shows that they were inclined to raise interest rates if inflation doesn't recede, minutes released today showed.

LR

Sterling hit a one month low against the Euro yesterday, following weak CPI data, which dampened expectations of further interest rate rises beyond the current 5 per cent. Sterling also fell against the dollar, despite the CPI figures being above the BoE's target of 2.0 per cent

Today, all eyes will be on The Bank of England's quarterly inflation report. This will be scrutinised by investors who will be looking for evidence of a possible further interest rate rise by the BoE. An unemployment report today is also expected to show that unemployment has reached a five year high, which may lead to further downward pressure on Sterling today.

Minutes of the Fed's last meeting are released today and is predicted to suggest that policy makers are more concerned about slowing US economic growth than faster inflation. This could therefore limit some of the gains experienced by the dollar this week.

The Yen weakened yesterday against the Dollar and Euro, following the release of a government report showing the Japanese economy grew twice as quickly as had been predicted for the third quarter. This led speculators to believe that this will lead to Japanese investors investing overseas in to higher yielding assets.

Elsewhere, the Indian Rupee fell to its lowest in more than three weeks on speculation state-owned banks will sell the currency on behalf of the central bank.

MA

Sterling firmed against the dollar and steadied off a one-month low versus the euro today as investors awaited British inflation data, expected to back up the Bank of England's latest interest rate rise to 5 percent. The consumer price index, due at 0930 GMT, is expected to rise 0.3 percent on the month to October, giving a year-on-year increase of 2.6 percent -- well above the BoE's 2.0 percent target. A higher than expected, or on target, reading would keep alive talk that the BoE's Monetary Policy Committee might implement further inflation-busting interest rate rises that would also boost sterling's yield appeal. Sterling faltered on Monday after British factory gate inflation slowed more than expected in October. However this week's main event is expected to be the Bank of England's quarterly inflation report on Wednesday, which investors will scan for further insight on the BoE's next rate move.

German investor confidence probably rose this month, recovering from a 13-year low after oil prices retreated from a record and European stocks advanced. The ZEW Centre for European Economic Research index of investor and analyst expectations of economic growth in six months may have risen to minus 24.5 from minus 27.4, which was the lowest since March 1993, ZEW releases its report at 11 a.m.

The yen gained the most in a week against the dollar after Japan's economy grew twice as fast as economists expected in the third quarter, fuelling speculation the central bank will raise interest rates again this year.

South Africa's rand advanced amid speculation the yield premium of local assets will improve as interest rates increase. South Africa's central bank, led by Governor Tito Mboweni, has raised its benchmark lending rate three times since June to 8.5 percent. A government report today may show U.S. retail sales slipped for a second month in October, according to a Bloomberg News survey of economists, making it less likely the Federal Reserve will raise interest rates. The currency has gained as foreign investors increased holdings of South African bonds.

New Zealand's dollar fell to a two- week low on concern a report tomorrow will add to signs economic growth is slowing, reducing the likelihood the central bank will raise interest rates. Retail sales probably fell for the first time in five months, according to the median forecast in a Bloomberg News survey of 12 economists, ahead of tomorrow's report. Traders pared bets of an interest-rate increase in December after unemployment rose last quarter. All 12 predict the central bank will keep rates on hold next month.

LR

The dollar weakened on speculation U.S. government reports this week will show slowing retail sales and inflation in October, allowing the Federal Reserve to consider interest-rate cuts.

However GBP still has its own issues and the U.K. pound may fall against the Euro on speculation Bank of England policy makers will raise interest rates only once more next year. GBP slid against its European counterpart last week after the BOE said it expected inflation to "fall back." A report today may show producer output prices fell for a second month in October. Although it is likely that Euro Zone rate rises will also slow GBP looks more vulnerable to weakness at current levels.

The yen's gains have been tempered by speculation Japan's economic growth failed to accelerate in the third quarter. Gross domestic product grew at an annual 1 percent rate, matching the slowest expansion since 2004, yet JPY fortunes in FX markets have been dominated by the China story and that looks set to give a positive tone to the JPY for the time being.

VC

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