Daily Insight

Following on from last week, the Dollar came under intense pressure against the majors as we trade back up towards 1.9000 against the Pound after the Federal Reserve elected to hold U.S interest rates at 5.25% for the fourth month in succession. The no change in policy for the month of October was widely anticipated although the accompanying statement wasn't as hawkish towards rising inflationary pressures as some had expected and as a result, we believe the Fed will keep rates on hold over the coming months as policy makers look for further evidence of a revival in the housing sector. The Dollar may decline further against the majors ahead of a key week of economic data with the focus falling on the monthly U.S employment report on Friday where it is widely anticipated that the economy added 125,000 jobs in October although the unemployment rate may stay unchanged at 4.6%. Elsewhere, there is some significant data released this afternoon in the States with the PCE deflator, the Fed's preferred measure of U.S inflation, expected to rise by a modest 0.2% this month.

The negative sentiment surrounding the Euro has continued over the last week as we continue to hold steady around 1.4900 versus the Pound. There is a host of significant economic factors this week, which could lend a boost to the ailing currency with the focus falling on the ECB interest rate announcement on Thursday and although we expect policy makers to hold rates at 3.25% the following statement will give us an insight into the prospect of a further rate hike in December. Historically, the chairman of the ECB, Jean-Claude Trichet, will use the term "strong vigilance" in his statement to give the market notice of an impending rise in Euro-zone interest rates the following month and we can expect the Euro to make gains against the majors if a firm indication is provided.

Despite a sparse supply of economic data, the Pound continued to make substantial gains against both the Dollar and the Euro last week but the positive sentiment surrounding sterling can be attributed to the likelihood of a further quarter-point rise in UK interest rates on the 9th November. The sustained and unrelenting growth in the housing sector combined with a pick-up in consumer sentiment has given policy makers the scope to continue monetary tightening this year in order to rein in inflation, which has been above the government's 2.0% target for the majority of 2006. In terms of economic data, UK mortgage approvals are expected to show a modest rise this month from 119,000 in September while UK house price inflation is forecast to ease slightly from 8.2% last month. Elsewhere, the governor of the BoE, Mervyn King is due to appear before the chairman of the House of Lords economic affairs committee tomorrow where he is expected to signal that a further tightening of UK rates is needed before the turn of the year.

Data Released 30th October

UK 09:30 Consumer Credit (September)
UK 09:30 Mortgage Approvals (September)

U.S 13:30 Personal Spending / Income (September)
- Core PCE Deflator

written by Adam Solomon