Daily Insight

The Pound made further gains against the majors yesterday, rising to a year high against the Euro following the release of the minutes from the Bank of England's last policy meeting where the MPC elected to hold UK interest rates at 4.75%. It was widely regarded that the minutes would provide some insight into the possibility of further rise in UK interest rates this year and policy makers did highlight persistant inflation concerns. The chancellor has raised his growth forecast for 2006 in the last month and the IMF have also expressed concerns that UK inflation will rise towards 2.7% by the turn of the year, which is way in excess of the government's 2.0% comfort zone. The minutes also showed that the eight-strong committee voted unanimously in favour of keeping rates on hold this month but it does look increasingly likely that the Bank of England will raise borrowing costs once more this year with many economists factoring in a probable hike in November. The Pound may make further gains this morning with the release of the CBI monthly trends survey, which showed that business expectations and new orders rose to a 20-month high in August and a strong figure is also expected tomorrow. Industrial production and manufacturing output will seemingly boost economic growth in the fourth quarter while the survey also highlights persistent inflationary concerns, which will only add to speculation that the BoE will raise interest rates again in November.

The Euro continues to struggle against the Pound falling to a year low yesterday at 1.4880 despite the apparent lack of economic data released this week and therefore, the Euro's decline can be attributed to a technical move through the strong resistance at 1.4850. However, Italian industrial sales dropped by 2.5% in July while orders gained an additional 1.2% against expectations of a more modest rise of 0.2%. The Italian data is likely to have a minimal impact on Euro-zone interest rate expectations with the next scheduled announcement in early October. We fully expect the ECB to lift rates for the fifth time this year next month and many economists have suggested that by the turn of the year, Euro-zone interest rates will be set at 3.5%. Therefore, Euro buyers would be well advised to take advantage of the current rate or at the very least work a stop order around 1.4800 in order to protect against any adverse market movement.

The Dollar remained largely unchanged last night after the Federal Reserve elected to hold U.S interest rates at 5.25% for a second month in succession and the accompanying statement reiterated that inflationary pressures continue to moderate, primarily due to a dramatic cooling of the housing market and a sharp fall in oil prices over the last month. However, inflation is still above the Fed’s comfort zone although the chairman, Ben Bernanke, seemed to suggest that the 17-consecutive rate hikes over the last two years would be sufficient in bringing inflation back under control. Therefore, it looks increasingly likely that U.S interest rates will remain at 5.25% for the remainder of this year with the next move likely to be a cut in early 2007. The Dollar may come under further pressure today with the release of the Philly Fed index, which is widely expected to decline to a reading of 15.0 from 18.5 last month.

Data Released 21st September

UK 11:00 CBI Monthly Trends Survey (Sept)

EU 09:00 Current Account (July)

U.S 13:30 Initial Jobless Claims (w/e 16th Sept)

U.S 17:00 Philly Fed Index (Sept)

U.S 15:00 Leading Indicators (August)

written by Adam Solomon