Daily Insight

The Pound came under increased pressure yesterday, trading down against both the Euro and the Dollar following some particularly negative commentary from a member of the Bank of England's monetary policy committee regarding a further rise in UK interest rates. The Pound has been making significant gains amid increased speculation that the MPC will lift rates once more before the turn of the year but David Blanchflower, who was the sole voice for a 'no change' in the August meeting, publicly stated that economic growth is likely to slow over the coming months while domestic inflation is likely to moderate as immigration is underpinning wage pressures. However, the negative sentiment that surrounded the Pound in the aftermath of his statement was fairly limited following the release of the CBI distributive trades survey, which came in ahead of expectations and provides further evidence of robust growth in retail spending as unemployment is reduced while the housing market continues to accelerate. There has already been some significant economic data released in the UK this morning as the nationwide index reported that house prices increased by the most in eight months in September, suggesting that the August rate hike did little to curb growth in the housing sector. There average cost of a home rose 1.3% from August with prices rising 8.2% year-on-year, which is the most since February 2005.

The Euro has been making steady gains against the Pound and the Dollar following some particularly positive economic data released yesterday morning as German consumer confidence unexpectedly increased this month despite significantly higher interest rates this year and a planned VAT tax increase at the start of 2007. In addition, the Euro-zone M3 money supply was also released and came out ahead of expectations as the 3-month moving average increased to 7.9% in the month of August, which was way in excess of the ECB's 4.5% target. The gains in money supply into Europe will only add to inflationary pressures and put further impetus on the Central Bank to lift interest rates by a further quarter-point in October. There has been some economic news already this morning as German unemployment dropped for a fifth month in six in September as consumer confidence in Europe's largest economy reached a five-year high this month.

The Dollar has made yet further gains against the Pound in light of some dovish commentary from the Bank of England yesterday despite a seemingly negative report into U.S durable goods orders, which unexpectedly dropped in August by 2.0% excluding transportation following a 2.7% decline the previous month and it was the first back-to-back decrease since May 2004. The U.S economy has entered a period of moderation as consumer spending falters and the housing market continues to retreat, leading to companies scaling back their investment plans in the face of slowing economic growth. Elsewhere, the Dollar received an unlikely boost after a report into new home sales rose unexpectedly in August and after a surprise increase in existing home sales earlier this week, speculation is mounting that the slowdown in the housing sector is beginning to ease. There is some hugely influential data released this afternoon in the States with the final estimate for U.S GDP in the second quarter and it is widely anticipated that the economy expanded at an annual rate of 2.9% from the first as a dramatic slowdown in the housing market this year hampers economic growth. The consensus mirrors the government's forecast in the preliminary estimate released last month but if growth has exceeded expectations in the second quarter, we can expect the Dollar to make further gains against Sterling.

Data Released 28th September

U.S 13:30 GDP / Deflator (Q2 Final)
U.S 13:30 Initial Jobless Claims (w/e 23rd Sept)

written by Adam Solomon