Daily Insight

Following on from last week, the Pound came under intense pressure against the majors following a revised report from the Office of National Statistics where it was announced that an error had been made in one of their inflation models, leasing to an incorrect measure of UK national income in the second quarter. Sterling dropped by 4 cents against the Dollar over the course of the week and fell back towards 1.4750 versus the Euro as the revised estimate suggested that the August rate hike wasn't entirely justified and has therefore had a negative impact on interest rate expectations for October. The focus this week in terms of economic events falls on the Bank of England interest rate announcement on Thursday and although the decision is finely balanced in light of updated forecasts on growth and inflation, we can expect the Monetary Policy Committee to hold interest rates this month in favour of a probable rise in November. As a result, the Pound may come under further pressure this week and the data released will take on added significance with the CIPS manufacturing survey released this morning and the consensus forecast suggests a softening of global economic activity in the last month. However, UK manufacturing output and industrial production data is due on Friday and is expected to show a year-on-year increase of 1.4% for the month of August.

The Euro made significant gains against Sterling last week despite a damaging report on the flash estimate consumer price index, which showed that Euro-zone inflation dropped below the ECB's 2% target for the first time since January 2005 as oils prices fell from a record level. Core prices rose just 1.8% from a year earlier in September, the slowest increase since March 2004 following a 20% drop in oil prices since mid July. However, the report has not clouded expectations of a further rate hike this week and we fully expect the European Central Bank to lift interest rates by a further quarter-point to 3.25% in their monthly announcement on Thursday. It can be argued that the impending rise in rates is already factored into the market and therefore, the following press conference will take on added significance as investors look for an insight as to whether the Central Bank will raise rates again in December. The chairman, Jean-Claude Tricht, has adopted a fairly hawkish rhetoric in previous statements and following a significant drop in oil prices, the market will be looking for a softening of the tone in order to gauge whether the ECB will raise rates to 3.50% before year-end. There is some significant data released in the Euro-zone this morning with the Purchasing Manager's report on Manufacturing expected to remain at elevated levels for the month of September suggesting continued growth in the sector.

The U.S Dollar enjoyed a sustained rally against the Pound last week as we dropped back towards the major support at 1.8640, which was the lowest point of the previous downside move. The positive sentiment surrounding the Dollar continued on Friday following a report on U.S personal income and expenditure, which showed that consumer spending had risen by just 0.1% in August while the PCE Deflator, the Fed's preferred measure of inflation, actually rose by 0.2% with core prices up 2.5% year-on-year, the biggest annual increase since April 1995. The report highlighted persistent inflationary pressures and may rekindle speculation that the Fed may need to raise interest rates once more before the turn of the year. However, from a technical perspective the major support level at 1.8640 held firm against the Pound and we have failed to break that level in the two previous downside moves. Therefore, Dollar sellers would be well advised to take advantage of the renewed strength or at least work a stop order around 1.8750 to protect against any adverse market movement. Without doubt, the focus this week in terms of economic data will be the monthly job report on Friday where nonfarm payrolls are expected to show an increase of 123,000 jobs in September while the unemployment rate is expected to remain unchanged at 4.7%. There is some significant data released this afternoon in the States with the ISM manufacturing report expected to show a modest drop towards a reading of 53.3 last month while construction spending may show a 0.2% rise in August.

Data Released 2nd October

UK 09:30 CIPS Manufacturing Survey (September)

EU 09:00 PMI Manufacturing (September)

U.S 15:00 Construction Spending (August)
U.S 15:00 Pending Home Sales (August)
U.S 15:00 PMI Manufacturing (September)

written by Adam Solomon