Daily Insight

The Dollar continued to make substantial gains against the majors yesterday, strengthening 0.5% against the Euro and a further 0.4% against the Pound as we closed under the major support level at 1.8600 for the first time in nearly 3-months. The recent positive sentiment surrounding the Dollar can be attributed to a mixture of strong economic data and hawkish commentary from Fed officials, which has rekindled interest rate speculation in the States. It was widely anticipated that U.S rates would remain on hold for the remainder of this year with the next likely move a cut in early 2007. However, recent comments from Donald Kohn, the Federal Reserve vice-chairman and the seemingly robust gains in the U.S labour market last month has prompted many investors to shift expectations away from a probable cut early next year. It can also be argued that the geopolitical tension surrounding North Korea has boosted the Dollar as investors sought a relative safe heaven in times of uncertainty. There was some significant economic data released yesterday with U.S wholesale inventories, often used as a leading indicator in the retail sector, posting a stronger than expected increase for the month of August at 1.1% despite expectations of a more modest rise towards 0.7%. Without doubt, the focus this evening in terms of economic data will fall on the minutes from the Federal Reserve's last interest rate announcement where policy makers elected to hold the benchmark lending rate at 5.25%. The dramatic slump in the U.S housing market this year will obviously weigh heavily on economic growth in the final three months of 2006 but with gains in employment and comments from Fed officials regarding heightened inflationary pressures, the minutes should provide some insight into the Fed's next move later this month.

The Euro managed to make modest gains against the Pound yesterday and the recent negative sentiment surrounding the single currency can be attributed to underlying Dollar strength rather than Euro weakness as the fundamental data released points to sustained economic growth in the face of rising interest rates. The ECB has lifted rates five times this year and it looks increasingly likely that the Central Bank will raise once more before the turn of the year although the 24% drop in oil prices has pushed inflation below the 2.0% target. There was a distinct lack of economic data released in the Euro-zone yesterday although French industrial production for August rose in line with expectations while manufacturing output reached 0.9% for the same period with a annual rate jumping to 1.0%. The focus this morning in terms of economic data will fall on the final estimate for Gross Domestic Product in the second quarter and the forecast suggests a modest rise to 0.9% while the annual rate of growth could jump up to 2.6%, which will only emphasise the need for a further rise in Euro-zone interest rates before year-end.

The Pound came under intense pressure against the Dollar yesterday, dropping to the lowest level since August as we fell through the major support level at 1.8600 following the release of some surprising weak trade data and a slightly worse than expected report on UK retail sales. The British Retail Consortium released their monthly retail survey yesterday and the report showed that sales we up 2.4% year-on-year in September, which was slightly under expectations although the figure still indicates growth in the sector. Elsewhere, the Pound came under further pressure on the release of the UK global trade balance, which showed that the deficit in good and services narrowed by less than expected in August with exports up from a 13% drop in July. The shortfall in trade came in at £6.7 Billion against expectations of a drop towards $6.3 Billion with exports rising 0.2% in August as a pick-up in global growth boosts demand for British made goods. Recent reports have suggested that trade would be insufficient in supporting economic expansion this year, which has added to doubts about whether the Bank of England will raise interest rates in November.

Data Released 11th October

EU 10:00 Final GDP (Q2)

U.S 19:00 Fed Issues Beige Book
U.S 19:00 FOMC Minutes of the 20th September meeting

written by Adam Solomon