Daily Insight

The Pound continued to make gains yesterday, firming 0.5% against the Dollar at a one-week high and a further 0.4% versus the Euro to breach the 1.4900 barrier following a glut of economic data on both sides of the Atlantic. The Pound rallied after a report on consumer price inflation supported the view that the Bank of England will need to lift UK interest rates next month. Consumer prices rose 2.4% year-on-year in September, down slightly from the previous month, which was largely in line with expectations but inflation is still above the Central Bank's 2.0% target despite a sustained drop in oil prices since Mid-July. Several BoE policy makers including the governor, Mervyn King, have expressed concerns of rising inflationary pressures with regards wage growth but it seems a 25% drop in oil prices will not direct speculation away from a probable rate hike in November. There is a host of significant economic data released in the UK this morning with the focus falling on the release of the minutes from the BoE last policy meeting where the MPC elected to hold interest rates at 4.75%. We will be looking for any further insight into the November rate announcement and the minutes will also indicate how the 8-strong committee voted last month. Elsewhere, a separate report on the UK labour market may show unemployment unchanged last month with the jobless rate holding steady at 3.0% despite an influx of migrant workers into the UK.

The Euro declined against Sterling yesterday but made modest gains against the Dollar following a damaging report on German investor confidence, which unexpectedly fell to the lowest reading in over 13-years this month as higher interest rates and the planned tax increase next year has a negative impact on the outlook for economic growth. The ZEW centre for European Economic Research reported that investor's expectations dropped to a reading of minus 27.4, the lowest since March 1993. In addition, the Euro came under further pressure following a less-than-convincing report on Euro-zone inflation as consumer prices rose by just 1.7% year-on-year in September as falling energy prices pushed the rate below the ECB's 2.0% target. However, although the report will do little to help the Euro, it is unlikely to sway interest rate expectations as it looks increasingly likely that the Central Bank will lift rates by a further quarter-point in December.

The Dollar came under intense pressure yesterday following a glut of significant economic data released in the States as the Producer Price index showed moderating inflationary pressures with prices falling by the most since April 2003 following a dramatic drop in energy costs over the same period. However, excluding the volatile food and energy gauge, prices paid by U.S producers increased by 0.6% last month, the most since January 2005. The report will do little to calm interest speculation in the States as investors shift away from a cut in U.S interest rates early next year to hold steady at 5.25%. Elsewhere, a separate report on U.S industrial production showed that output fell by more than anticipated in September, dropping 0.6% from the previous month, the biggest fall in a year. The Dollar may come under further pressure this afternoon following a report on consumer prices, which may show moderating inflation concerns after a sustained drop in energy prices over the last two months, while elsewhere, a report on the U.S hosing market may show that builders started work on fewer new homes last month, cementing the view that housing will be unable to support economic growth in the final quarter.

Data Released 18th October

UK 09:30 BoE MPC Minutes
UK 09:30 Unemployment (September)
UK 09:30 Average Hourly Earnings (3 months to August)

EU 10:00 Trade Balance (August)

U.S 13:30 Consumer Price Index (September)
U.S 13:30 Housing Starts Annual (September)

written by Adam Solomon