Daily Insight

The Dollar lost ground against the majors last night as the Federal Reserve elected to hold U.S interest rates at 5.25% for the third consecutive month, which was widely anticipated although the tone of the accompanying statement didn't match investor's expectations. Following a host of hawkish rhetoric from Fed officials over the past month and a string of positive economic data, the market was hoping for a strong indication that the Reserve Bank would hold interest rates at the current level in the first quarter of 2007. Instead, the tone of the statement stuck closely to the language used in the September meeting and diminished the prospect of a further rate hike following a massive drop in oil prices over the last quarter.

The Dollar dropped significantly against the Pound as we open this morning's session above 1.8800 and the greenback may come under further pressure this afternoon with the release of New Home sales data, which may mirror the previous report earlier this week and show sales down to an annual rate of 1.048 million in September. The dramatic slump in the housing market this year has contributed heavily the downturn in economic growth after the Fed decided to lift U.S interest rates seventeen times over a two year period. Elsewhere, a separate report on U.S durable goods orders may show a rise of roughly 2.0% in September following an unexpected decline of 0.5% the previous month.

The Euro made significant gains against the majors yesterday, firming 0.5% against the Euro and pushing through the support at 1.4900 versus the Pound following a stronger-than-expected survey on German business confidence. The Ifo index climbed to a reading of 105.3 this month despite the consensus forecast suggesting a modest drop towards 104.5 as the manufacturing component of the index rose to the highest level since June. The index supports the view that the ECB will need to continue lifting interest rates over the coming months as inflation pressures and economic growth continues to advance despite the introduction of the value added tax increase at the start of next year. The Euro received a further boost against Sterling this morning following a positive report on German consumer confidence, which rose to the highest level in five years as households step up spending before the tax increase in January.

Data Released 26th October

U.S 13:30 Initial Jobless Claims (w/e 21st October)
U.S 13:30 Durable Goods Orders (September)
U.S 15:00 New Home Sales (September)

written by Adam Solomon