Daily Insight

The Pound declined yesterday, dropping 0.2% against the Dollar following the release of the minutes from the Bank of England's last monetary policy meeting where the MPC elected to hold interest rates at 4.75% for the second month in a row. However, with UK inflation still above the Central Bank's 2.0% target, two members out of the eight strong committee voted to lift interest rates this month citing wage growth and other inflationary pressures for the need to increase borrowing costs. The six other members including the Governor, Mervyn King, all voted to keep rates on hold in October but it does look increasingly likely that the BoE will hike interest rates to 5.0% in the first week of November. Elsewhere, a separate report on the UK labour market showed that unemployment had increased to a five-year high last month as the influx of migrant workers swells the workforce. The number of Britons out of work and claiming benefits rose by an additional 10,200 in September, taking the annual rate up to 962,000, the highest since December 2001 while growth in wages slowed in all sectors except services, where it was unchanged at 3.5%. The Pound may receive a boost against the majors this morning as UK retail sales probably increased last month following the sustained growth in house prices and record employment encourages consumer spending.

The Euro fell against the Dollar yesterday, falling a further 0.2% despite a hawkish rhetoric from ECB member Klaus Liebscher who reiterated concerns that inflation risks remain at a high level due to rising taxes and growth in wages. His statement followed a similar tone of the recent press conference with the chairman, Jean-Claude Trichet, stating that there was no need to change current market expectations, which implies that a further quarter-point rate rise is likely in December. There is a sparse supply of economic data released in Europe this week but a report yesterday on the Euro-zone trade balance showed that the deficit in goods and services actually narrowed in August following a 3.2% rise in exports over the same period.

The Dollar rose against the majors yesterday, firming an additional 0.2% against the Euro and the Pound following a surprisingly strong housing report, which decreased the risk of a cut in U.S interest rates early next year. New Housing Starts increased by 5.9% last month to an annual rate of 1.77 Million, which was way ahead of expectations and suggests the housing slump may be nearing bottom. However, a separate report also showed that building permits dropped for an eighth consecutive month to the lowest level since 2001, which indicates that growth in housing starts may not be sustainable in the coming months. In addition, the Dollar stood firm in the face of some particularly soft U.S inflation data as consumer prices fell by the most since November 2005 last month, which correlates with the decline in energy costs that may cool inflation in the fourth quarter. The consumer price index dropped by 0.5% from August while core prices excluding food and energy rose 0.2% for a third month in succession.

Data Released 19th October

UK 09:30 Retail Sales (September)

U.S 13:30 Initial Jobless Claims (w/e 14th October)
U.S 15:00 Leading Indicators (September)
U.S 17:00 Philly Fed Index (October)

written by Adam Solomon