Daily Insight

Following on from last week, the Dollar continued to make steady gains against the Euro and the Pound on Friday following an upward revision of the August nonfarm payrolls numbers, although the September report showed that the economy added much fewer jobs than anticipated last month. The initial reaction saw the Dollar decline against the majors as the monthly report showed a modest increase of 51,000 jobs last month against expectations of a rise towards 123,000. However, the momentum shifted when the report also highlighted improvement in U.S unemployment, which actually shrank to 4.6% in September while the average hourly wage also showed a 0.2% rise. The focus this week in terms of economic news will fall on the minutes from the Fed's last policy meeting due for release on Wednesday and the report should provide an insight into the Fed's thinking in the build up to the next FOMC rate announcement later this month. The minutes are expected to portray the Fed's view of slowing economic growth while also acknowledging the risks of higher inflation. Elsewhere, the Dollar may come under pressure later this week with the release of the U.S trade data for August and it is widely expected that the deficit in goods and services will show a modest improvement from July's record $68 Billion shortfall.

The Euro failed to make any significant gains against the Pound or the Dollar last week despite the ECB's decision to lift Euro-zone interest rates for the fifth time this year although the tone of the press conference was somewhat subdued with regards a further tightening of rates later this year. In the accompanying press conference, the market was looking for a clear indication that policy makers would be raising rates by a further quarter-point to bring borrowing costs upto 3.50% by year-end. However, the chairman, Jean-Claude Trichet, dropped the term 'vigilant from his statement and it seems that although the Central Bank look likely to raise rates in December, the ECB will adopt a 'wait and see policy' over the next month as a 24% drop in oil prices dampens inflationary pressures. There has been some positive data coming of Germany in recent weeks and following an unexpected rise in German manufacturing orders, we can expect a strong report this week on German industrial production, which is expected to show year-on-year growth at 5.9% in August. Elsewhere, there has been some significant data released this morning that has continued to weigh on Euro sentiment as German exports unexpectedly fell in August as demand from overseas moderated in the face of slowing U.S economic growth.

The Pound remained relatively firm against the Euro despite the Bank of England's decision to leave UK interest rates on hold at 4.75% this month although last week's data suggests a probable hike in rates in November. Growth in manufacturing and the service sector continues to bolster economic growth while the housing market continues to show robust gains despite a surprising rise in borrowing costs in August. There is a sparse supply of economic data released in the UK this week but the Pound may receive a boost from the British Retail Consortium's survey, which is expected to show strong growth in sales for September. Elsewhere, the Pound may come under pressure from a report on the UK global trade balance, which unexpectedly widened in July with exports posting a massive 13% drop from June and if the report this Wednesday shows that the deficit has widened further, we can expect the Pound to decline as it will seem increasingly unlikely that trade will be unable to support growth. The focus in terms of economic data today will fall on the UK Producer Price Index where input prices may continue to portray moderating inflationary pressures while output prices are expected to drop from 2.6% year-on-year in August to 2.0% last month.

Data Released 9th October

UK 09:30 Producer Price Index (September)
UK 09:30 DCLG House Prices (August)

GER 11:00 Industrial Production (August)

written by Adam Solomon