Daily Insight

The Pound declined against the majors yesterday following a worse-than-expected report on UK retail Sales, which fell for the first time in eight months for September led by a dramatic fall in petrol prices and rising unemployment. Retail sales accounts for over a third of UK consumer spending, which fell 0.4% last month despite forecasters anticipating a rise of roughly 0.3% as rising jobless claims, larger mortgage repayments and high inflation prevents consumers from hitting the high-street. The report, together with a significant drop in consumer price inflation earlier this week, could potentially spark speculation that the Bank of England will hold off raising UK interest rates next month and thusly the Pound has come under some pressure against the Euro. The focus this morning in terms of economic data will be the preliminary estimate for GDP growth in the third quarter and forecasters are anticipating that economic growth year-on-year will accelerate to 2.7% from 2.6% in the second quarter.

The Euro received a timely boost yesterday as German forecasts for economic growth were revised up from previous estimates to 2.3% in 2006 while 2007 growth will slow to 1.4%, which suggests that the largest economy in Europe has peaked and will begin moderating next year following the introduction of the value-added tax in January 2007. Elsewhere, another member of the European Central Bank has joined the calls for the Central bank to remain vigilant on inflation despite the 25% drop in oil prices over the last 3-months, which has pushed the annualized rate back under the 2.0% comfort zone.

The Dollar initially made gains against Sterling yesterday although by the close of trading last night we were significantly higher, trading above the trend resistance at 1.8750 following a host of poor economic reports this week with declines in consumer and producer price inflation backing calls for a cut in U.S interest rates in the first quarter of 2007. The Dollar dropped a further 0.4% yesterday following a report on manufacturing in the Philadelphia region, which unexpectedly fell for a second consecutive month in September. The Fed index fell to a reading of minus 0.7 last month and the report will only fuel speculation that a slowdown in the sector combined with the obvious slump in housing will lead to a cut in U.S interest rates early next year.

Data Released 20th October

UK 09:30 GDP (Preliminary Q3)

written by Adam Solomon