Daily Insight

Following on from last week, the Pound made further gains against both the Euro and the Dollar to trade above 1.4900 for the first time this year while Sterling also traded above 1.9000 versus the Dollar. That trend looks set to continue in the beginning of this week amid a plethora of significant data released in Europe and the States with the focus falling on the CBI distributive trades survey on Wednesday where the market will be looking for further evidence of a strong rise in retail spending. While elsewhere, UK house price inflation and mortgage approvals will provide some insight as to whether the strong growth in the housing market will be sustained going into the fourth quarter and therefore add to the case for a further rise in UK interest rates. There was also strong support from the Pound following comments from the deputy governor of the Bank of England, Sir John Gieve, who stated that he considered voting for a rise in rates this month where the MPC unanimously elected to hold their benchmark interest rate at 4.75%. As a result, Sterling rose 0.2% against the Euro to cross back above 1.4900 but was fractionally weaker against the Dollar following some surprisingly better U.S housing data.

The Euro continues to struggle against the Pound following a sparse supply of economic data released last week but many economists view the next four days as pivotal in terms of data with several important releases spread over the week. Firstly, the flash estimate for the harmonised consumer price index may show that inflationary pressures have moderated in the last month with forecasters anticipating a marginal fall below 2.0%, which correlates with a 20% drop in oil prices since July. Following the significant drop in German economic sentiment in the last month, the Ifo index released this morning will take on added significance as business confidence probably fell for a third month in September due to higher interest rates and the planned tax increase scheduled for 2007. The index is widely expected to drop to a reading of 104.4 in September from 105 in August and fall below the consensus is likely to hurt the Euro. Economic expansion in Europe's largest economy is beginning to look bleak as a slowdown in global growth has a negative effect on German exports while the increase in value added tax will undoubtedly hurt consumer spending. However, it does look likely that the ECB will raise interest rates next week as the fastest growth since 2000 threatens to fuel inflationary concerns.

The Dollar has weakened significantly against the Pound in the last week following a damaging report from the Philadelphia Fed, which showed that manufacturing activity in the region declined for the first time since April 2003 this month. The index dropped 0.4% from a reading of 18.5 in August led by a significant decline in new orders and exports out of the U.S and therefore, the Chicago PMI and Richmond Fed surveys will be watched closely this week for further evidence of a slowdown in the manufacturing sector. It does look increasingly likely that the Federal Reserve will hold U.S interest rates for the remainder of this year but until the chairman, Ben Bernanke, publicly declares his intention to keep rates on hold, we can expect any Dollar weakness to be limited with the economic data released taking on added significance. The Dollar did receive an unlikely boost yesterday amid the release of some important housing data, which showed that sales of existing homes dropped by less than expected in August to an annual rate of 6.30 million. However, median house prices dropped 1.7% year-on-year last month, which was the first annual decline since April 1995. There is some significant data released this afternoon in the states with consumer confidence likely to improve in September from a nine-month low the previous month as a large drop in petrol prices lends a boost to sentiment.

Data Released 26th September

GER 09:00 Ifo Index (September)

U.S 15:00 Consumer Confidence (September)
U.S 15:00 Richmond Fed Index

written by Adam Solomon