Daily Insight

The Euro lost yet more ground against Sterling yesterday, falling to a new yearly low for the fourth day in succession as we traded above 1.4950 for the majority of the European session. Following a damaging report from the ZEW centre of economic research last week into German investor confidence and the seemingly moderating inflationary pressures, the Euro has come under increased pressure against the Pound as a significant drop in oil prices threatens to curb economic expansion and therefore dampen interest rate expectations. As a result, the Ifo index into German business confidence took on added significance yesterday and reported a decline in sentiment for the third month in a row in September, slipping to a reading of 104.9, which was actually slightly ahead of expectations. Economic growth in Europe's largest economy is widely expected to slow dramatically into 2007 as higher interest rates and a planned tax increase weigh heavily on consumer spending. However, it can also be argued that the German economy has accelerated to the fastest pace since 2000 this year and the planned increase in sales tax could prompt consumers to spend now before the introduction in January. This has been emphasised in a report this morning into German consumer confidence, which has risen to the highest level in 5-years this month. The index, which aims to forecast household spending a month in advance, rose to a reading of 8.8, the highest since November 2001 as the faster economic growth and falling unemployment help boost sentiment.

The Pound has looked increasingly strong over the past few weeks as speculation continues to mount that the Bank of England will need to raise UK interest rates again before the turn of the year with many economists factoring in a further quarter-point increase in November. There is some significant data released this morning in the UK with the CBI distributive trades survey expected to provide further evidence of sustained growth in retail spending despite the BoE's surprise rate hike in August. In addition, a report on second quarter gross domestic product is released this morning with the final estimate set to be unchanged from earlier reports with economic growth coming in at 2.6% year-on-year in the second quarter.

The Dollar has made significant gains against the Pound this week following a better than expected report on the sales of existing homes in the States as we drop back under 1.8900 against Sterling. The dollar received a timely boost yesterday as U.S consumer confidence rebounded in September following a sharp rise in petrol prices since July and the report suggests that the Federal Reserve have the scope to continue raising interest rates if inflationary pressures begin to resurface. The index reported that sentiment rose to a reading of 104.5 this month following a nine-month low in August as the labour market shows signs of growth and personal income continues to rise. With the sustained slump in the U.S housing market weighing heavily on economic expansion, cheaper fuel prices will provide some temporary relief to the consumer. There is some significant data released this afternoon in the States, which could effectively push the dollar higher against the majors with durable goods orders, excluding transport, expected to increase by 0.8% in August, which will provide further evidence that corporate investment will help spur economic growth. Elsewhere, a report this afternoon may provide further evidence of a slowdown in the housing sector as the sales of new homes are expected to fall to an annual rate of 105 Million in August as higher interest rates discourage first time buyers.

Data Released 27th September

UK 09:30 GDP (Q2 Final)
UK 09:30 Current Account Balance (Q2)
UK 11:00 CBI Distributive Trades (September)

EU 09:00 M3 / 3 Month moving Avg (August)

U.S 13:30 Durable Goods Orders (August)
U.S 15:00 New Home Sales (August)

written by Adam Solomon