Daily Insight

The Pound declined against the majors yesterday, dropping 0.3% against the Euro and a further 0.5% versus the Dollar following the Bank of England's decision to hold UK interest rates at 4.75% this month as a 24% drop in oil prices since mid-July eased inflationary pressures. It was widely anticipated that the MPC would leave rates unchanged for a second month in succession but the Pound declined as the market reacted with disappointment after factoring in a 30% probability of a surprise rate hike this month. We will have to wait until the 18th of October for the minutes of the meeting to be released where the market will be looking for further evidence of a possible rise in UK interest rates in November. Inflation still remains well above the government's 2.0% comfort zone and above-average economic growth has prompted speculation that policy makers including the governor of the BoE, Mervyn King, will raise rates by a further 25 basis points before the turn of the year. There is some significant economic data released in the UK this morning with industrial production expected to increase by 0.1% in August while manufacturing output is likely to increase to 1.4% year-on-year from 1.0% in July.


The Euro lost ground against the Dollar yesterday, dropping by 0.3% despite the European Central Bank's decision to lift Euro-zone interest rates for the fifth time this year as growth in the economy accelerated at the fastest pace since 2000 this year. Policy makers decided to lift rates by a further quarter-point to 3.25% despite recent reports suggesting inflation had dropped below the Central Bank's 2.0% target following a significant drop in energy prices. However, the move had been widely anticipated and the accompanying press conference would always take on added significance as the market looks to gauge whether the ECB will lift rates once more in December. However, the tone and rhetoric of the press conference was far less aggressive than in previous months as the chairman, Jean-Claude Trichet, dropped the term 'vigilance' from his statement. He has used this terminology as a trigger to the market that policy makers intend to raise rates the following month and therefore, we can discount the possibility of a rise in Euro-zone interest rates in November. Instead, Trichet went on to say that the Central Bank will 'monitor the inflation risk very closely' over the coming months and also stated that the current lending rate is still relatively low despite going from 0.25% to 3.25%. Therefore, it seems the ECB will perhaps raise rates in December but will adopt a more cautious approach over the next month or so and as a result, any Euro gains will be limited.

The Dollar made significant gains against Sterling yesterday, firming by 0.5% to close around the trend support at 1.8750 last night. There was a distinct lack of fundamental data released in the States yesterday but the positive sentiment surrounding the Dollar continued following a report from the U.S labour market on initial jobless claims. The number of people out of work and claiming benefits fell by more than expected in the last week, which perhaps provides an insight into the monthly job report this afternoon. Initial claims fell by 17,000 from the previous week to 302,000, the lowest since the final week in July. The Dollar may make further gains today and test the major support level around 1.8600 following the release of U.S nonfarm payrolls this afternoon where it is widely anticipated that the economy added 123,000 jobs in September while the average hourly earnings may increase by 0.3% and the unemployment rate remains unchanged at 4.7%.

Data Released 6th October

UK 09:30 Industrial Production (August)
- Manufacturing Output

U.S 13:30 Nonfarm Payrolls (September)
- Unemployment Rates
- Average Hourly Earnings

written by Adam Solomon