Daily Insight

Following on from last week, the Pound remained strong against the majors after a preliminary report on UK GDP showed that the economy grew at a faster pace than expected in the third quarter led by growth in the service industries and manufacturing sector. Economic growth has increased at the fastest pace in three years in 2006 and the report last Friday will only cement the prospect a further quarter-point rise in UK interest rates on the 9th November. The calendar for UK economic data is particularly light this week with the focus falling on hometrack house prices and the CBI industrial trends survey, which may provide a boost for the Pound as output remains at an elevated level despite the obvious drop in oil prices.

The Euro has continued to decline against the majors over the past week despite hawkish rhetoric from a number of key ECB officials, backing calls for a further tightening of monetary policy before year end, stating that current interest rates are still at a relatively low level. Nevertheless, the Euro has failed to make any gains against the Pound amid speculation that economic growth has peaked in 2006 with the introduction of the value-added tax increase in Germany at the start of next year weighing on sentiment. There is a sparse supply of significant European data released this week with the focus falling on the German Ifo index for Business confidence and we can expect the Euro to come under further pressure against the Pound if expectations continue to shrink from a reading of 104.9 last month.

Without doubt, the most significant event this week will be the October FOMC interest rate announcement on Wednesday and although we expect the Federal Reserve to hold U.S rates at 5.25%, the accompanying press conference may retain a hawkish tone with regards future policy following recent inflation reports and comments from Fed officials. The Dollar has come under sustained pressure against the Pound over the last week, falling back towards 1.8770 at the close last week but there is a host of data released in the States this week that may prove crucial for Dollar sentiment. The focus will fall on the advanced GDP report for the third quarter released on Friday and it is widely anticipated that U.S growth will slow to 2.2% following a dramatic slowdown in the housing market over the same period.

Data Released 23rd October

UK 00:01 Nationwide House Prices
UK 00:01 Hometrack House Prices

written by Adam Solomon