Daily Insight

Following on from last week, the Dollar remained firm against the Pound and the Euro on Friday despite some soft inflation data and an unexpected fall in industrial production in the last month. U.S consumer price inflation, excluding food and energy, rose 0.2% in August, which was largely in line with expectations and further emphasises that inflation seems to be moderating following the Fed's sustained campaign in raising interest rates over the past two years. The focus this week will fall heavily on the FOMC rate announcement on Wednesday where it is widely anticipated that the Fed will hold interest rates at 5.25% for the second month in succession as the Reserve bank take time to assess how monetary tightening has contributed to a slowdown in economic growth. There is a host of significant data released this afternoon in the States that could weigh heavily on Dollar sentiment including a report from the National Association of Home Builders. The survey has reported a slowdown in the property market for the past 10-months in succession and is expected to decline further this month, raising concerns that the U.S economy is heading for recession. Elsewhere, the Dollar may come further pressure following a report on the U.S Current Account balance, which is widely expected to show that the deficit has widened in the second quarter from $208.7 to $215 Billion. The trade deficit reached a record level in July at $68 Billion and therefore the report this afternoon on net capital inflows will take on added significance as forecasters anticipate a drop towards $70 Billion in July, which will just about cover the ever widening gap in goods and services.

There was a distinct lack of fundamental data released in the Euro-zone last week and as a result, the Euro suffered against the majors, falling back towards the year high at 1.4850 against the Pound. However, the focus this week will largely fall on German consumer price inflation and the ZEW Expectations index tomorrow, which is widely expected to show a further decline in business confidence in Europe's largest economy. The German CPI may also decline in August with core prices expected to drop in the face of falling oil prices while the scheduled increase in value-added tax, set to be introduced at the start of 2007, is expected to weigh on consumer spending. There is some significant data released this morning in the Euro-region with industrial production set to remain unchanged at an annual rate of 4.3% year-on-year in July. In the last week, a host of ECB policy makers have publicly stated their concerns over persistently higher inflation and also indicated that monetary tightening may continue into 2007.

There is a sparse supply of economic data released this week in the UK with the focus falling on the minutes of the Bank of England's last policy meeting where the MPC kept interest rates on hold at 4.75% following a surprise increase in August. It is widely anticipated that the 8-strong committee voted unanimously to keep rates on hold last month but the minutes should provide an insight into the prospects of a further rate hike before the end of the year and any suggestion of this is likely to lend a boost to Sterling. Elsewhere, the CBI industrial trends survey may reflect the dramatic fall in oil prices over the last month, which will have a positive effect on input costs and suggest greater confidence in UK manufacturing.

Data Released 18th Sept

EU 10:00 Industrial Production (July)

U.S 13:30 Current Account (Q2)
U.S 14:00 TICs - Net Capital Inflow (July)
U.S 18:00 NAHB Housing Index (September)

witten by Adam Solomon