Daily Insight

The Pound declined against the majors yesterday, falling 0.3% against the Dollar to close near the major support level at 1.8645 and a further 0.3% against the Euro on the release of some softer than expected inflation data. UK Producer Prices fell for the first time in nine-months in September, which correlates with the significant drop in energy prices and may be an indication that inflationary pressures are easing going into the fourth quarter. Output prices fell by 0.3% in August but it is unlikely that the PPI will have too much of a bearing on UK interest rate expectations, although next week's consumer price inflation and GDP report will take on added significance as the market looks for a further insight into the outcome of November's MPC meeting. The Pound may come under further pressure today amid a glut of significant economic data released in the UK this morning. The global trade balance is expected to remain relatively unchanged from last month with the deficit in good and services at £6.3 Billion and it will be interesting to gauge whether there has been an improvement in UK exports following a 13% drop in June. In addition, the British Retail Consortium's monthly sales survey will provide an insight into personal consumption in the UK and we can expect further growth in sales for September.

The Dollar managed to make further gains yesterday, showing a marginal rise against the Euro despite the U.S Bank Holiday and together with the robust employment report and significant drop in oil prices over the past month, we can expect the Dollar to remain firm as interest rate speculation continues to dominate. It is widely anticipated that the Federal Reserve will leave U.S interest rates on hold at 5.25% for the remainder of this year with the next likely move a cut in early 2007. However, the Fed have yet to confirm these rumours and following the strong growth in the labour market and recent reports of higher inflation, we can't discount the possibility that the Fed could lift rates once more before the turn of the year. There is a sparse supply of significant data released in the U.S today with the focus falling on Wholesale Inventories, which is widely expected to remain relatively strong for the month of August.

The Euro made modest gains against the Pound yesterday following a mixed bag of European data, which showed that the German trade balance came in lower than anticipated in August at €11.2 Billion while the current account also posted a decline towards €2.4 Billion. Elsewhere, Industrial production in Europe's largest economy increased by more than expected at 1.9% for August, which was the highest reading in almost three years, propping the core rate at up to 7.2%. The report correlates with the rise in factory goods orders over the same period and provides further evidence of growth in the manufacturing sector. Following the tentative statement from the chairman of the ECB, Jean-Claude Trichet, last week with regards a further rise in Euro-zone interest rates, the data released will take on added significance over the coming month as we look for a further indication of monetary tightening in December. There has already been some economic data released in Europe this morning with French industrial production rising for the third time in four months.

Data Released 10th October

UK 09:30 Global Trade Balance (August)
UK 11:00 BRC Retail Sales Survey (September)

U.S 15:00 Wholesale Inventories (August)

written by Adam Solomon