Daily Insight

The Pound advanced yesterday firming 0.2% against the Dollar to halt a 5-day slide and was also marginally higher against the Euro by the close last night following comments from the governor of the Bank of England, Mervyn King, who emphasised that UK inflation remains a concern for policy makers, suggesting a further quarter-point rise in interest rates next month. His speech warned investors not to over-react to the seemingly moderating inflationary pressures in September following a sustained drop in energy prices since July. The Bank of England will adopt a vigilant stance over the next month as policy makers look to growth in personal income as an indication of UK inflation and at present, it seems likely the MPC will lift UK interest rates to 5.0% next month. The Pound has received a further boost this morning as Cable bounces back above 1.8600 with an index of UK house prices rising to the highest level in four years last month according to a report from the Royal Institute of Chartered Surveyors. The robust growth in the housing sector will only spur speculation that the BoE intend to raise borrowing costs in November. There is some significant economic data released in the UK this morning with the release of the BCC quarterly manufacturing survey, which is widely expected to mirror recent reports of growth in the sector for the third quarter.

The Euro remained relatively unchanged against the majors yesterday despite a report on Euro-zone Gross Domestic Product in the second quarter. The EU lowered its final estimate for economic growth in 2007 to 0.7% in the further quarter, which was slightly under expectations and the report reiterated concerns that the Euro-zone economy is moderating in the face of falling energy prices and the planned value-added tax increase in Germany at the start of next year. Elsewhere, the Euro stood firm despite wholesales prices in Germany dropping by 0.5% last month, although the report will do little to shift interest rate expectations as the ECB look to raise rates for the sixth time before the turn of the year. However, following a further rise in rates last week the ECB monthly bulletin this morning is widely expected to mirror the soft tone of the press conference as the policy makers adopt a more cautious approach towards monetary tightening. There has already been some significant data released in Germany this morning with consumer price inflation dropping to the lowest level in more than two years last month primarily due to sharp drop in oil prices. Consumer prices rose just 1.0% year-on-year in September with the inflation estimate revised down to 1.1%, the lowest since February 2004.

The Dollar consolidated its recent gains yesterday, remaining relatively unchanged against the Euro as interest rate expectations shifts away from a probable cut early next year. The minutes of the Fed's September meeting were released last night and the statement failed to mention the prospect of monetary easing over the coming months. However, the report also highlighted a "substantial risk" that inflation won't moderate as previously anticipated following a significant drop in fuel prices and personal income. The minutes will only add to speculation that the Fed will keep the benchmark interest rate on hold following a series of strong economic data and comments from Fed officials that reiterate concerns over higher inflation. Policy makers within the Fed seem divided on whether the slump in housing and slowing economic growth will help ease inflation and that will only add further emphasis to the next FOMC rate announcement later this month. There is some very significant data released in the States this afternoon with the release of the U.S trade balance and it is widely anticipated that the deficit in good and services narrowed in August following a record shortfall in July.

Data Released 12th October

UK 11:00 BCC Quarterly Manufacturing Survey (Q3)

EU 09:00 ECB Monthly Bulletin

U.S 13:30 Trade Balance (August)

U.S 14:30 Initial Jobless Claims (w/e 7th October)

written by Adam Solomon