Daily Insight

Yesterday's Durable Goods orders from the US were in line with forecasts, and sales of new homes jumped 13% to a new record for October. Consumer confidence was also firm, giving investors a good indication that Xmas sales will be strong.

The dollar reacted predictably to these reports, undoing a large part of Monday's rally in the cable and eurusd rates. Further reports from the US this afternoon should help to give further direction.

UK CPI this morning (09:30) is unliekly to give the market any clear view on interest rates, unless it is well out of the expected range of 2.3% - 2.5%.

GBP EUR - Support 1.4580, 1.4535/50 then 1.4500
Resistance 1.4650 then 1.4742

GBP USD - Support 1.7160, 1.7140 then 1.7050
Resistance 1.7270/85, then 1.7345

DATA: UK CPI (09:30)
EMU Q3 GDP (10:00)
UK Consumer Confidence (10:30)
US Q3 GDP (13:30)
Chicago PMI (15:00)

Weak sales of existing homes (down 2.7% for October) drove the dollar lower yesterday, despite an otherwise robust housing sector, with prices up 16% on the year. The dollar fell to 1.7340 overnight. Most analysts are nevertheless brushing off yesterday's rally, saying that the market will bring interest rates back into focus, and that the dollar's yield advantage will provide support.

The slew of data out this week should tell us whether the dollar will remain weak or rebound against the euro and sterling. The most important figures out will be US Durable Goods orders (today 13:30), Q3 GDP (Wed, 13:30), Chicago PMI (Wed 15:00) and ISM Manufacturing (Thursday 15:00).

UK House Prices were flat on the month in data releases at 07:00 this morning.

GBP USD - Support 1.7210 then 1.7150
Resistance 1.7300, then 1.7345

GBP EUR - Support 1.4535/50 then 1.4500
Resistance 1.4650 then 1.4742

DATA: UK Consumer credit and Mortgages (09:30)
US Durable Goods (13:30)
US Consumer Confidence (15:00)

After a quiet one last week I am expecting more movement for the week ahead, and we have plenty of data to drive the markets from Wednesday onward.

The ECB meet on Thursday (1st December), and the market is pricing in a strong probablity of a 0.25% interest rate hike, bringing Euro rates to 2.25%. Despite this expectation, the Euro contines to slump against the Dollar today, though it gains versus Sterling.

GBP EUR - Support 1.4535/50 then 1.4500
Resistance 1.4650 then 1.4742

GBP USD - Support 1.7000 then 1.6935
Resistance 1.7100 then 1.7230

DATA: US Leading Indicators 15:00

A boring day as expected yesterday, and most Americans will be sleeping it off today so I expect a relatively inactive dollar.

Sterling may see some movement on the release of revised Q3 GDP, with some analysts expecting a slight upward revision.

Here's a snippet from yesterday's testimony by BOE govenor Mervyn King, given to the Treasury Select Committee on the November Inflation report.

MERVYN KING

"We will set interest rates on the basis of the outlook for inflation. Nothing more, nothing less."

"So far the committee has drawn great comfort from the fact that we have not seen second round effects so far."

"It is important that there are not these second round effects because if there were that would help to push up inflation relative to our central projection, our central projection does not include any second round effects in the future. If there were to be any, that would push up our inflation projection and other things being equal, which of course in practice they never are, but other things being equal would make it more likely than not that policy would be tightened. That is higher interest rates. And that point is made absolutely explicit in the Inflation Report."

"The Chancellor is certainly right to draw attention to the need in both public and private sectors for earnings growth not to try and compensate for that part of the pick up in inflation that corresponds to higher energy prices."

On export outlook: "Given the exchange rate and the very solid growth of world trade we would expect to see continuing growth in exports."

"We are beginning to see now in the euro area some signs that growth is likely to pick up towards trend."

On housing market: "I think our view is that the housing market is continuing to be broadly stable in terms of prices." He said activity had picked up and that prices had risen a little faster than expected.

GBP USD - Support 1.7200 then 1.7150 and 1.7062
Resistance 1.7260 then 1.7285

GBP EUR - Support 1.4600 then 1.4535/40
Resistance 1.4660/75 then 1.4740

DATA: UK GDP 09:30
US Jobless Claims 14:45

*****It's Thanksgiving today in the US, so we may have a relatively inactive day on the markets.*****

A quiet day yesterday, with not much in the way of data. All nine MPC members voted to keep interest rates steady at 4.5% in the November meeting, a clear indication that we shouldn't be expecting any change for December/January. The Bank is in "wait and see" mode.
Cable and EuroDollar spent the day in tight ranges following Tuesday's big rally, and SterlingEuro remains weak.

In terms of today's data there is the German IFO survey at 09:00 which could impact the Euro.

GBP EUR - Support 1.4550 then 1.4530
Resistance 1.4600, 1.4655 then 1.4675

GBP USD - Support 1.7200, 17150 then 17062
Resistance 1.7260 then 1.7302

Cable briefly made new lows yesterday but there didn't seem to be any appetite for further downside and the market swiftly rebounded above 17100.

The minutes the last Federal Reserve meeting caused a serious stir last night as it was revealed that Fed givernors had debated a slight change in the language used to accompany the last rate hike. While the Fed remain of the opinion that inflation is the biggest threat to the US economy, they discussed a possible slow down in the "measured pace" of rate rises that we have seen in place since June 2004. This may not sound massively significant, but it represents that first sign of cold feet from the Fed in the current cycle, and with traders having had a "green light" to buy the dollar for the last few months it caused a big move in the markets, driving cable from 17100 to 17250, and Euro from 11720 to 11860 overnight.

****We have the MPC minutes from the 10th November meeting (no change) this morning at 09:30.***

GBP USD - Support 1.7200, 17150 then 17062 (yesterday's low)
Resistance 1.7260 then 1.7302

GBP EUR - Support 1.4532 then 1.4500
Resistance 1.4600, 1.4657 then 1.4675

DATA: MPC Minutes 09:30
Michigan confidence index 14:45

The ECB is going to run into credibility problems if they keep giving the markets such a unclear steer on interest rates. It seems that while the bank is prepared to raise rates in the near term, they are trying to give the impression that "monetary policy accomodation" (economic speak for low rates!) will not be removed entirely, and that they can contain inflation with a gentle programme of rate rises while also allowing the Eurozone to grow and access capital relatively cheaply. That's the overall impression I get anyway! The market did not like it, and sent the Euro plunging back toward recent lows. It also served to stem Sterling's slide against the Euro, putting in a nice reversal for the day witha close above the psychological 1.4600 level.

GBP EUR - Support 1.4600 then 1.4545
Resistance 1.4660-70 then 1.4745

GBP USD - Support 1.7135 then 1.6994
Resistance 1.7225-45 then 1.7302

DATA: FOMC minutes 19:00 (expect to see unanimous vote!)

The ECB president is getting into the habit of surprising the markets. Only two weeks ago he made unexpectedly dovish comments at the ECB press conference, describing the current interest rates at 2.0% as "appropriate". Then on Friday he said almost the exact opposite, indicating that the ECB is ready to raise rates at the December or January meeting. Trichet said the ECB is ready 'to moderately augment the present level of interest rates in order to take into account the level of risks to price stability'.

The market will be watching his testimony to the European Parliament today in which he's expected to reaffirm his intention to raise rates.

With a Euro rate rise in the pipeline the market is likely to test the Euro's strength against the dollar early this week, with cable likely to be dragged along also.

The Yen continues to fall agaisnt the dollar as the interest rate differential persists (4.25% USD and 0.0% JPY), with Japanese politicians leaning heavily on Bank of Japan to maintain zero rates.

GBP USD - Support 1.7150 then 1.7100
Resistance 1.7225 then 1.7300

GBP EUR - Support 1.4555 then 1.4500
Resistance 1.4600 then 1.4675

DATA: US Leading Indicators 15:00

We were hoping that yesterday's Bank of England report would give sterling some direction, well it certainly did that! The bank lowered its inflation expectations over the next two years, resulting in the conclusion that there is no chance of an interest rate rise in the New Year as the market was coming to expect in recent weeks. This was bad news for sterling, and after pausing briefly at the 14750 support, we continued to trade lower.

Today we have UK Retail Sales at 09:30, then the usual Thursday releases from the US at 13:30. See below.

GBP EUR - Support 1.4680, 1.4650 then 1.4600
Resistance 1.4780 then 1.4810-25

GBP USD - Support 1.7137 then 1.7080
Resistance 1.7200 then 1.7302

DATA: UK Retail Sales 09:30
US Housing starts, Jobless claims, Industrial Production and Philly' Fed' all at 13:30. The Industrial Production will be the most important figure today.

A rather mixed bag yesterday, with sterling trading weaker after lower than expected inflation figures. Today's Bank of England Inflation Report sound gives an idea of their revised targets and view on interest rates, and will hopefully give sterling some direction.

The US PPI was also uninspiring, and the dollar reacted with the usual bout of extreme volatility before settling relatively unchanged on the day. Economists agree that despite the decline in core inflation, the Federal Reserve will still continue its measured pace of rate rises, although there is little evidence to suggest that inflation is spreading from the energy sector to other products. Retail sales fell a less than expected 0.1%.

French non-farm payrolls were slightly below expectations this morning, but the Euro has not reacted.

GBP EUR - Support 1.4780 then 1.4750
Resistance 1.4830 then 1.4865

GBP USD - Support 1.7325, 1.7301 then 1.7270
Resistance 1.7397 then 1.7497

DATA: UK unemployment and average earnings 09:30
BOE Inflation Report 10:30
US CPI (consumer price index, following on from yesterday's producer prices) 13:30
US Net Foreign Securities Purchases 14:00 (this figure came out at $90Bn+ last month versus expectations of $60Bn, which goes a long way to explaining the dollar's strength. Asian investors are the most prolific buyers of US treasuries as they seek better yields. Rates in Japan are nearly zero!)

An unexpected drop on factory output prices is the reason for sterling's weakness yesterday. Factory prices (ie. prices for finished goods) declined 0.1% on the month, versus expectations of a 0.2% rise. This suggests that inflation may not be gathering pace as as some had feared, and the inflationary pressures are still limited to energy related products. For example, the price of scrap steel actually fell 16% on the year. The overall costs of raw materials rose by 0.3%, but the fall in factory prices suggests that producers are not attempting to pass on this cost to the consumer.

German GDP (Gross Domestic Product measures total economic output in an economy) rose 0.6% for the third quarter of 2005, versus expectations of 0.5%. This does not appear to be having any impact on the Euro.

Italian GDP is released at 09:00

UK Retail Price Index at 09:30 will be closely watched today for confirmation that secondary inflation is not becoming evident in retail prices.

Plenty of US data at 13:30 with PPI being the most important.

GBP EUR - Support 1.4815, 1.4800 then 1.4780
Resistance 1.4880 then 1.4910

GBP USD - Support 1.7340, 1.7324 then 1.7270
Resistance 1.7400, then 1.7517

DATA: UK RPI at 09:30
US PPI, Empire manufacturing and Retail Sales at 13:30

Lots of comment in the press over the weekend on the Euro's slide. Continuing trouble in France, ECB indecision over interest rates cited as reasons for the weakness.

Very often it is not the news itself, but the market's reaction to news items that gives the best indication of market direction. The enourmous $66Bn US trade deficit should have produced a major negative reaction for the dollar, but on the contrary, the greenback continued to rally versus the Euro. This reaction to fundamental news is very instructive, and shows the lack of appetite for the single currency.

The week ahead is crammed with inflation data, in particular the UK RPI (Retail Price Index) on Tuesday, the Bank of England Infaltio report on Wednesday and US CPI (Core Price Index), also on Wednesday. Thursday sees the release of UK Retail Sales (October) and US Industrial Production, Philadelphia Fed survey and Jobless claims.

GBP EUR - Support 1.4820-30 , 1.4800 then 1.4780
Resistance 1.4910 then 1.5000

GBP USD - Support 1.7430, 1.7400 then 1.7325
Resistance 1.7517 then 1.7600

DATA: UK Producer Prices 09:30 - This figure has a bearing on inflation. If it comes out high, the market will be looking for confirmation from the RPI on Tuesday.

Today is a US holiday (Veteran's Day).

Euro weakness was the main theme yesterday, with EURUSD weaker, GBPEUR up, and GBPUSD only down a little.

No change from the MPC, as expected.

US consumer confidence was 79.9, higher than the expected 76.5.

The US Trade Deficit was higher than expected, at a record $66.5Bn for the month of September, the rise being accoutned for by falling exports and the rising cost of imported oil.

GBP EUR - Support 1.4830 then 1.4800
Resistance 1.4900 - 1.4910 then 1.5000

GBP USD - Support 1.7325(Tuesday's low) then 1.7275 (July low)
Resistance 1.7517 then 1.7600

DATA: None

The dollar rallied yet again yesterday, breaking the April 2004 lows against EUR and dragging cable down through the October low at 1.7388. The riots in France are certainly not helping the Euro.

Sterling remains firm against the Euro and most other currencies, the dollar being the main exception.

GBP EUR - Support 1.4755 then 1.4720
Resistance 1.4830 then 1.4870

GBP USD - Support 1.7320 then 1.7270
Resistance 1.7420 the 1.7590

Trichet's comments on Thursday continued to pressure the Euro through the end of last week.

More importantly, Friday's jobs report showed a strong wage growth component, further fueling fears over inflation, and giving the dollar a good excuse to continue its rally. We have now broken the 1.1868 level (July lows), making a new low for 2005. The last time we traded down here was in April 2004. The long term implication is that the dollar may be finding its feet after a four year bear market.

Economists are eyeing the US Trade Deficit with increasing concern. Alan Greenspan has warned of "serious economic disruptions" if the deficit cannot be brought under control in the medium term. The September deficit is released on Thursday.

GBP EUR - Support 1.4755 then 1.4720
Resistance 1.4830 then 1.4870

GBP USD - Support 1.7450 then 1.7420, 1.7388
Resistance 1.7525 then 1.7585, 1.7705

DATA: UK Industrial Production 09:30
German Industrial Production 11:00
US Consumer Credit 20:00

Despite stating that the ECB was "ready to move at any time necessary" on interest rates, Trichet's remarks failed to give a clear indication of a near term rate hike, and the Euro took an immediate hammering as a result.

Alan Greenspan's testimony before the Joint Economic Committee of the US Congress also helped the dollar's bullish tone after he reiterated earlier comments that the US economy remains firm, and that the recent hirricanes will not have a lasting effect.

The non-farm productivity report was the icing on the cake for dollar bulls, showing a gain of 4.1% versus expectations of 2.5%.

Interest rate futures markets are now pricing in three consecutive rate rises for Dec, Jan and Feb, lifting the Fed' funds rate to 4.75%. This will give the US a positive differential against sterling for the first time in several years.

GBP EUR - Support 1.4780 then 1.4740
Resistance 1.4830 then 1.4900

GBP USD - Support 1.7650 then 1.7575
Resistance 1.7725 then 1.7795

DATA:
10:00: EMU Enemployment and Producer Prices (this could provide evidence of inflation)
2:30: US "Employment Situation", which now includes Non-Farm Payrolls. Consensus is +110,000, and unemplyment at 5.1%

This is an interesting snippet on interest rate differentials with regard to EURUSD. Note how most analysts' estimates are "sitting on the fence" at 1.1500 -1.2900.

Personally, I think the Euro rate outlook will strengthen as inlfation spreads across the Atlantic, and the US rate outlook will weaken as consumer and corporate spending begins to suffer, leading to a big Euro rally during 2006.

EURO-DOLLAR: As background, the last time the US had a 2.0% interest rate advantage over the eurozone was in 1999, just after the euro's inception. From April 1999 (ECB cut to 2.5% from 3.0% with fed funds at 4.75%) until Oct 2000 (ECB raised to 4.75% from 4.50% vs fed funds at 6.50%) the dollar sported at least a 2.0% interest rate differential vs the euro. Over this period (April 99 - Oct 2000) the euro saw a rough range of $1.0910 (Oct 1999 high) to $0.8225 (Oct 2000 low). Looking forward to next year, futures are pricing in nearly three ECB hikes by the end of 2006 and an addition three Fed hikes before the "pause" comes. This will still keep a 2.0% interest rate differential in the dollar's favor, analysts remind. Despite this, the market leans toward euro bullishness. The Oct 31 FX Week has 33 analysts estimates for the euro 12 mos from now: 12 see a $1.30 or higher euro, 4 see a $1.1500 or
lower euro, and 17 are in a $1.15-$1.29 range

Claude Trcihet failed to make any hawkish comments, describing current interest rates as "appropriate". It was his use of this word that sparked the Euro sell off.

The statement was very unclear on the ECB's intentions, neither confirming nor denying that rates will rise in the near term. The market was expecting a firm indication of higher rates ahead, thus the current Euro slump!

Markets drifted on lack of data yesterday, with a slightly weaker dollar being the pervasive theme. In contrast, today is packed with releases, most importantly the ECB press conference at 13:30. Claude Trichet is expected to make hawkish comments on inflation and interest rates, with some analysts now giving 50/50 odds of a quarter point rate rise in December. If Trichet fails to confirm his bullish attitude to rates, the Euro could come under pressure. There is some expectation now built into the market.

US figures also 13:30, with ISM (non-manufacturing) and factory orders at 15:00.

The non-manufacturing ISM surveys nearly 400 firms from 60 sectors across the United States, including agriculture, mining, construction, transportation, communications, wholesale trade and retail trade, and as such is a good barometer of the US economic backdrop. We are expecting a reading of 57.0. A stronger figure would be further evidence of inflation, and it will be interesting to see if the dollar still reacts to this, or whether the inflationary outlook is now priced into the market.

GBP EUR - Support 1.4680 then 1.4645
Resistance 1.4725 then 1.4775

GBP USD - Support 1.7720 then 1.7605
Resistance 1.7772 then 17816

DATA: ECB!!!!!.....Decision at 12:45 and press conference at 13:30
Non-farm productivity and Jobless claims at 13:30
Factory orders and ISM at 15:00

Analysts are now unanimous in their view that UK rates will remain on hold until at least February, when some believe the BOE will cut by a quarter point. Median estimates put the rate at 4.0% at the end of 2006, against the current 4.5%. This implies relatively flat rates going forward.

The Fed raised US rates by a quarter yesterday, now at 4%, the highest level since mid 2001. The dollar's reaction was non-existant, as this move was already widely priced into the markets. More important than the move itself, was the accompanying statement which maintained the "measured pace" phrase which implies further rate hikes ahead.

Some analysts are now worrying that continued rate increases with a strong emphasis on controlling inflation is actually providing a misleading outlook on the US economy, which could suffer a downturn if the removal of "monetary accommodation" (low interest rates) continues at the current pace.

US investors will be watching the ISM figures closely on Thursday for further clues on the economy.

GBP EUR - Support 1.4645 then 1.4600
Resistance 1.4700, 1.4720 then 1.4775

GBP USD - Support 1.7605 then 1.7575
Resistance 1.7680 then 1.7725

DATA: German unemplyment was down 90,000 from last month, but up 344,000 from a year earlier, the unemployemtn rate now running at 11%

Weak retail sales figures from Germany sparked a Euro sell off yesterday. Sales were down 1.6% on the month versus expectation of 0.2%.

Nationwide house price data released this morning is showing an average price rise of 1.3% for October, which is giving cable a little boost.

The Federal Reserve will today raise US interest rates by 0.25% to 4%. Another quarter point is already priced in for the December meeting.

GBP EUR - Support 1.4735 then 1.4645
Resistance 1.4780 then 1.4810

GBP USD - Support 1.7655 then 1.7600
Resistance 1.7820-25 then 1.7900-03

DATA: Nationwide House Prices (already released, +1.3% for October)
US ISM Manufacturing (3pm) - Expecting 56.0 Vs 59.4 last time.
FOMC Interest Rate announcement 21:15