Daily Insight

The Dollar came under increased pressure against the majors yesterday, dropping 0.6% against the Euro and a further 0.7% versus the Pound following a combination of strong European data and a worse than expected report on U.S manufacturing. However, the significant drop against Sterling can be attributed to a technical move rather than a negative reaction to poor economic data as we failed to break through the support level at 1.8640. Therefore, the market retraced back towards the trend resistance at 1.8750 and following a report from the institute of supply and management, we broke through in dramatic fashion to close last night above 1.8850. The ISM index showed that manufacturing in the U.S expanded at a slower pace than anticipated in September, dropping to a reading of 52.9, the lowest since May 2005. The report mirrors the dramatic slowdown in the U.S housing market and it looks increasingly likely that the Federal Reserve will hold interest rates at the current 5.25% for the remainder of the year. Elsewhere, a separate report from the commerce department showed that spending on home construction fell for a fifth straight month in August, which emphasises the Fed's forecast that slower economic growth will help contain inflation.

The Pound has been trading down against most major currencies over the past week following a damaging report from the Office of National Statistics on wage growth in the UK, which suggested that inflationary pressures were not at the level previously reported. However, Sterling remained firm against the Euro yesterday after a survey on UK manufacturing came in stronger than expected with the CIPS purchasing managers index rising to a reading of 54.4 in September against a revised estimate of 53.0 the previous month. The robust growth in the manufacturing sector has led to speculation that the Bank of England may indeed raise interest rates by a further quarter-point this week instead of adopting a wait and see policy over the next month. The market is anticipating a further rise in UK rates towards November but following the surprise hike in August we can not discount the possibility that the BoE will move this week.

The recent positive sentiment surrounding the Euro continued yesterday following a report on European manufacturing, which expanded for the fifthteenth month in succession in September, giving ECB policy makers yet more ammunition to raise Euro-zone interest rates this week. The index posted a reading of 56.6 last month, which was ahead of expectations and matched the robust growth shown in August. The European economy has expanded by the most in six years in the second quarter and the Central Bank has lifted interest rates four times already this year in order to bring inflation back towards the 2.0% target. However, following a significant drop in oil prices since mid-July, the latest inflation gauge showed a drop below the bank's target and therefore, the press conference on Thursday will take on added significance as the market looks for an insight as to whether interest rates will be lifted to 3.5% in December. There is some significant data released this morning in the Euro-region with the latest report on producer price inflation widely expected to increase by 0.2% in August although core prices may drop back towards 5.7% from July while elsewhere, the unemployment rate for the twelve nations sharing the Euro is expected to remain unchanged at 7.8%.

Data Released 3rd October

EU 10:00 Producer Price Index (August)
EU 10:00 Unemployment Rate (August)

written by Adam Solomon