Daily Insight

Friday's inflation data from the US was the main news of the day, with energy prices in the wake of hurricane Katriana contributing to the 1.2% CPI figure. This was the largest gain in 25 years!

There is a two-fold impact from this news. Firstly, it absolutely cements the view that the Federal Reserve will raise interest rates in November, and probably again in December in an attempt to cool the economy. This would usually be bullish for the dollar, but the figures were so high that the worry now is of dollar devaluation. If prices are rising rapidly, a dollar tomorrow buys you less than a dollar today, and this means the currency is devaluing against others. The market has been holding onto the belief that the Fed's interest rate rises will stop inflation in its tracks, and that the main outcome will simply be higher rates, which draw in investment flows and prop up the dollar.

The worry now is that the Fed' is not in control of inflation, because the main contributor is rising energy prices, which they are NOT able to influence. This is why the dollar was sold off after the data releases on Friday.

GBP EUR - Support 1.4600 then 1.4500
Resistance 1.4655 then 1.4700

GBP USD - Support 1.7600 then 1.7535
Resistance 1.7735 then 1.7820

DATA: US Empire Manufacturing Index (13:30) - Forecast 15.00