Daily Insight

The Pound made robust gains against the majors yesterday, firming an additional 0.5% versus the Euro to peak at 1.4970, the highest point since June 2005, while against the Dollar, Sterling advanced beyond the resistance level at 1.9000 following a particularly strong report on the UK housing market. Recent surveys from Halifax and Nationwide has showed house prices to be accelerating at the fastest pace in over 2-years despite the Bank of England's surprise decision to raise UK interest rates to 4.75% in August. Therefore, it looks increasingly likely that the MPC will lift rates by a further quarter-point next month as growth in the housing sector continues to accelerate and absorbs higher borrowing costs. The Pound rallied yesterday on the release of UK mortgage approvals for the month of September, which unexpectedly rose to highest level in two and a half years at 126,000 compared with a revised 120,000 the previous month and the report suggests that UK consumers are undeterred by rising mortgage rates.

There is a plethora of significant economic data released in the UK this morning with the focus falling on the Gfk gauge of consumer sentiment, which is widely expected to ease slightly in October. Elsewhere, the Pound may receive a further boost from the governor of the BoE, Mervyn King, who delivers a speech to the House of Lords economic affairs committee this afternoon and is expected to declare the need for a further tightening of UK of monetary policy. We are fast approaching the psychologically important resistance level at 1.5000 against the Euro and buyers of this currency would be well advised to take advantage of the current rate or at the very least place a stop order at 1.4900 to protect against any adverse market movement.
The Euro has been under intense pressure against the Pound over the past few weeks amid a sparse supply of significant European data but this morning the ailing currency may receive a much needed boost as Euro-zone unemployment is expected to shrink to 7.8% in the report for September. Elsewhere, the flash estimate for Euro-zone inflation is also released this morning and is expected to remain relatively unchanged at 1.7% in the initial estimate, which is slightly under the Central Bank's 2.0% comfort zone and suggests moderating inflationary pressures in the face of falling oil prices. However, with the planned value-added tax increase in Germany next year, Euro-zone inflation is not expected to remain below the ECB's target for long. Elsewhere, the EC sentiment index for consumer and industrial confidence is released this morning and may stay relatively unchanged from a reading of 109.3 in October.

The Dollar fell by a further 0.2% against the Pound yesterday but managed to make modest gains versus the Euro following a particularly soft report on U.S economic growth as personal spending rose by 0.1% in September following a 0.2% increase the previous month. However, while U.S personal income grew by 0.5% over the same period to increase by the most in three months, the PCE deflator, which is the Fed's preferred gauge of U.S inflation actually decelerated, quashing any notion that policy makers will raise interest rates from the current 5.25%. Growth in the labour market and falling fuel prices are positive news for the American consumer and will soften the effects of a slump in the U.S housing sector this year as the Fed look to keep interest rates steady over the coming months. In terms of economic data, the Dollar may receive a boost this afternoon as consumer confidence is expected to rise to the highest level since April this month as lower fuel prices encourages spending.

Data Released 31st October

UK 10:30 Gfk Consumer Confidence (October)
UK 11:00 CBI Distributive Trades (October)
UK 14:35 BoE's Mervyn King testifies to the House of Lords Economic Affairs Committee

EU 10:00 EC Economic Sentiment (October)
- Consumer / Industrial
EU 10:00 Flash HICP (October)
EU 10:00 Unemployment Rate (September)

U.S 15:00 Chicago PMI (October)
U.S 15:00 Consumer Confidence (October)

written by Adam Solomon

Following on from last week, the Dollar came under intense pressure against the majors as we trade back up towards 1.9000 against the Pound after the Federal Reserve elected to hold U.S interest rates at 5.25% for the fourth month in succession. The no change in policy for the month of October was widely anticipated although the accompanying statement wasn't as hawkish towards rising inflationary pressures as some had expected and as a result, we believe the Fed will keep rates on hold over the coming months as policy makers look for further evidence of a revival in the housing sector. The Dollar may decline further against the majors ahead of a key week of economic data with the focus falling on the monthly U.S employment report on Friday where it is widely anticipated that the economy added 125,000 jobs in October although the unemployment rate may stay unchanged at 4.6%. Elsewhere, there is some significant data released this afternoon in the States with the PCE deflator, the Fed's preferred measure of U.S inflation, expected to rise by a modest 0.2% this month.

The negative sentiment surrounding the Euro has continued over the last week as we continue to hold steady around 1.4900 versus the Pound. There is a host of significant economic factors this week, which could lend a boost to the ailing currency with the focus falling on the ECB interest rate announcement on Thursday and although we expect policy makers to hold rates at 3.25% the following statement will give us an insight into the prospect of a further rate hike in December. Historically, the chairman of the ECB, Jean-Claude Trichet, will use the term "strong vigilance" in his statement to give the market notice of an impending rise in Euro-zone interest rates the following month and we can expect the Euro to make gains against the majors if a firm indication is provided.

Despite a sparse supply of economic data, the Pound continued to make substantial gains against both the Dollar and the Euro last week but the positive sentiment surrounding sterling can be attributed to the likelihood of a further quarter-point rise in UK interest rates on the 9th November. The sustained and unrelenting growth in the housing sector combined with a pick-up in consumer sentiment has given policy makers the scope to continue monetary tightening this year in order to rein in inflation, which has been above the government's 2.0% target for the majority of 2006. In terms of economic data, UK mortgage approvals are expected to show a modest rise this month from 119,000 in September while UK house price inflation is forecast to ease slightly from 8.2% last month. Elsewhere, the governor of the BoE, Mervyn King is due to appear before the chairman of the House of Lords economic affairs committee tomorrow where he is expected to signal that a further tightening of UK rates is needed before the turn of the year.

Data Released 30th October

UK 09:30 Consumer Credit (September)
UK 09:30 Mortgage Approvals (September)

U.S 13:30 Personal Spending / Income (September)
- Core PCE Deflator

written by Adam Solomon

The Dollar lost ground against the majors last night as the Federal Reserve elected to hold U.S interest rates at 5.25% for the third consecutive month, which was widely anticipated although the tone of the accompanying statement didn't match investor's expectations. Following a host of hawkish rhetoric from Fed officials over the past month and a string of positive economic data, the market was hoping for a strong indication that the Reserve Bank would hold interest rates at the current level in the first quarter of 2007. Instead, the tone of the statement stuck closely to the language used in the September meeting and diminished the prospect of a further rate hike following a massive drop in oil prices over the last quarter.

The Dollar dropped significantly against the Pound as we open this morning's session above 1.8800 and the greenback may come under further pressure this afternoon with the release of New Home sales data, which may mirror the previous report earlier this week and show sales down to an annual rate of 1.048 million in September. The dramatic slump in the housing market this year has contributed heavily the downturn in economic growth after the Fed decided to lift U.S interest rates seventeen times over a two year period. Elsewhere, a separate report on U.S durable goods orders may show a rise of roughly 2.0% in September following an unexpected decline of 0.5% the previous month.

The Euro made significant gains against the majors yesterday, firming 0.5% against the Euro and pushing through the support at 1.4900 versus the Pound following a stronger-than-expected survey on German business confidence. The Ifo index climbed to a reading of 105.3 this month despite the consensus forecast suggesting a modest drop towards 104.5 as the manufacturing component of the index rose to the highest level since June. The index supports the view that the ECB will need to continue lifting interest rates over the coming months as inflation pressures and economic growth continues to advance despite the introduction of the value added tax increase at the start of next year. The Euro received a further boost against Sterling this morning following a positive report on German consumer confidence, which rose to the highest level in five years as households step up spending before the tax increase in January.

Data Released 26th October

U.S 13:30 Initial Jobless Claims (w/e 21st October)
U.S 13:30 Durable Goods Orders (September)
U.S 15:00 New Home Sales (September)

written by Adam Solomon

The Pound has been making steady gains against the majors in recent weeks but following a report from the Confederation of British Industry yesterday, Sterling eased 0.1% against the Dollar and the Euro. The CBI industrial trends survey, which provides a good insight into UK manufacturing activity, came in weaker than expected and the report suggests that economic growth will begin moderating in the coming months, which will in turn lead to lower inflationary pressures and prevent any further rate increases being necessary. However, the monthly survey also supported the view that rising prices will lead to a one more quarter-point rise in UK interest rates next month and fully expect the BoE to lift rates to 5.0% by the turn of the year.

The Euro inched lower against the Dollar yesterday following a disappointing report on French consumer spending while elsewhere, upward revisions of the Euro-zone current account deficit proved unable to boost the ailing currency despite expectations that the ECB will continue monetary tightening in December. In addition, Industrial orders jumped significantly in the figures for August by a massive 14.3% year-on-year despite expectations a more modest rise towards 9.7%. The consistent performance of European industrial production and manufacturing output has been the primary source for economic growth this year and sustained gains in the European export industry has led to the fastest growth since 2000. The Euro has lost further ground against Sterling this morning despite a better-than-expected report on German business confidence, which rose for the first time in four months in October led by a sharp decline in oil prices.

The Dollar made modest gains against both the Euro and the Pound yesterday as we build up to the monthly FOMC rate announcement this evening and the tension in the market is directed at the Fed's accompanying statement, which should provide an indication of future monetary policy and whether the committee will keep U.S interest rates on hold at 5.25% in the coming months. However, in recent weeks there have been a barrage of hawkish rhetoric from key Fed officials and if the statement doesn't match expectations, the Dollar could come under pressure against the Pound. There was a sparse supply of economic data yesterday with the sole release being the Richmond business activity index, which provides an insight in to the ISM report later this month and confirmed an underlying weakness in the U.S manufacturing sector. In addition to the FOMC interest rate announcement, there is some significant housing data released this afternoon in the States and following the unexpected rise in sales last month, existing homes sales is widely expected to decline to an annual rate of 6.23 million in September.

Data Released 25th October

GER 09:00 Ifo Business Confidence Index (October)

U.S 15:00 Existing Home Sales (September)
U.S 19:00 FOMC Rates Decision

written by Adam Solomon

The Dollar advanced yesterday, firming 0.7% against the Pound and a further 0.5% versus the Euro despite the apparent lack of any significant economic data released in the States as falling oil prices may boost growth in the U.S economy going into the final quarter of the year. Ahead of the FOMC rate announcement tomorrow, the Dollar may make further gains against the majors as recent hawkish rhetoric from a number of key Fed officials has shifted interest rate expectations in the first quarter of 2007. However, we expect the Federal Open market committee to leave U.S interest rates on hold at 5.25% this month and the accompanying statement may support the view that the Fed will adopt a 'wait and see' policy for the remainder of 2006. There is some significant data released this afternoon with the Richmond Fed Survey, which will provide an insight into manufacturing ahead of the ISM report later this month.

The Pound came under pressure yesterday despite the lack of data released in the UK but there is a significant report this morning from the Confederation of British Industry who release their monthly report on industrial trends in the UK manufacturing sector. It is widely anticipated that the survey will show a drop in activity in October and bearing in mind the report is watched closely by the Bank of England in determining interest rates, we can expect the Pound to decline if the survey comes out in line with expectations.

The Euro stood firm against the Pound yesterday as German retail sales came in largely as expected and yet another member of the ECB's governing council has publicly announced the need for further monetary tightening. The Central Bank has raised Euro-zone interest rates on five occasions this year and we fully expect policy makers to increase borrowing costs by a further 25 basis points in December to end the year at 3.50%. Council member, Nout Wellink has joined the chorus of voices calling for a further rate hike later this year, saying that current borrowing rates are still "very low" despite the fact that inflation has seemingly dropped below the Bank's 2.0% target primarily due to a sharp decline in oil prices. The Euro may receive a boost this morning from an economic report on European industrial orders, which is widely expected to increase by 0.5% in August following the fastest economic expansion in six years.
Data Released 24th October

UK 11:00 CBI Industrial Trends Survey (October)

EU 09:00 Current Account Balance (August)
EU 10:00 Industrial Orders (August)

U.S 15:00 Richmond Fed Survey (October)

written by Adam Solomon

Following on from last week, the Pound remained strong against the majors after a preliminary report on UK GDP showed that the economy grew at a faster pace than expected in the third quarter led by growth in the service industries and manufacturing sector. Economic growth has increased at the fastest pace in three years in 2006 and the report last Friday will only cement the prospect a further quarter-point rise in UK interest rates on the 9th November. The calendar for UK economic data is particularly light this week with the focus falling on hometrack house prices and the CBI industrial trends survey, which may provide a boost for the Pound as output remains at an elevated level despite the obvious drop in oil prices.

The Euro has continued to decline against the majors over the past week despite hawkish rhetoric from a number of key ECB officials, backing calls for a further tightening of monetary policy before year end, stating that current interest rates are still at a relatively low level. Nevertheless, the Euro has failed to make any gains against the Pound amid speculation that economic growth has peaked in 2006 with the introduction of the value-added tax increase in Germany at the start of next year weighing on sentiment. There is a sparse supply of significant European data released this week with the focus falling on the German Ifo index for Business confidence and we can expect the Euro to come under further pressure against the Pound if expectations continue to shrink from a reading of 104.9 last month.

Without doubt, the most significant event this week will be the October FOMC interest rate announcement on Wednesday and although we expect the Federal Reserve to hold U.S rates at 5.25%, the accompanying press conference may retain a hawkish tone with regards future policy following recent inflation reports and comments from Fed officials. The Dollar has come under sustained pressure against the Pound over the last week, falling back towards 1.8770 at the close last week but there is a host of data released in the States this week that may prove crucial for Dollar sentiment. The focus will fall on the advanced GDP report for the third quarter released on Friday and it is widely anticipated that U.S growth will slow to 2.2% following a dramatic slowdown in the housing market over the same period.

Data Released 23rd October

UK 00:01 Nationwide House Prices
UK 00:01 Hometrack House Prices

written by Adam Solomon

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

The Pound declined yesterday, dropping 0.2% against the Dollar following the release of the minutes from the Bank of England's last monetary policy meeting where the MPC elected to hold interest rates at 4.75% for the second month in a row. However, with UK inflation still above the Central Bank's 2.0% target, two members out of the eight strong committee voted to lift interest rates this month citing wage growth and other inflationary pressures for the need to increase borrowing costs. The six other members including the Governor, Mervyn King, all voted to keep rates on hold in October but it does look increasingly likely that the BoE will hike interest rates to 5.0% in the first week of November. Elsewhere, a separate report on the UK labour market showed that unemployment had increased to a five-year high last month as the influx of migrant workers swells the workforce. The number of Britons out of work and claiming benefits rose by an additional 10,200 in September, taking the annual rate up to 962,000, the highest since December 2001 while growth in wages slowed in all sectors except services, where it was unchanged at 3.5%. The Pound may receive a boost against the majors this morning as UK retail sales probably increased last month following the sustained growth in house prices and record employment encourages consumer spending.

The Euro fell against the Dollar yesterday, falling a further 0.2% despite a hawkish rhetoric from ECB member Klaus Liebscher who reiterated concerns that inflation risks remain at a high level due to rising taxes and growth in wages. His statement followed a similar tone of the recent press conference with the chairman, Jean-Claude Trichet, stating that there was no need to change current market expectations, which implies that a further quarter-point rate rise is likely in December. There is a sparse supply of economic data released in Europe this week but a report yesterday on the Euro-zone trade balance showed that the deficit in goods and services actually narrowed in August following a 3.2% rise in exports over the same period.

The Dollar rose against the majors yesterday, firming an additional 0.2% against the Euro and the Pound following a surprisingly strong housing report, which decreased the risk of a cut in U.S interest rates early next year. New Housing Starts increased by 5.9% last month to an annual rate of 1.77 Million, which was way ahead of expectations and suggests the housing slump may be nearing bottom. However, a separate report also showed that building permits dropped for an eighth consecutive month to the lowest level since 2001, which indicates that growth in housing starts may not be sustainable in the coming months. In addition, the Dollar stood firm in the face of some particularly soft U.S inflation data as consumer prices fell by the most since November 2005 last month, which correlates with the decline in energy costs that may cool inflation in the fourth quarter. The consumer price index dropped by 0.5% from August while core prices excluding food and energy rose 0.2% for a third month in succession.

Data Released 19th October

UK 09:30 Retail Sales (September)

U.S 13:30 Initial Jobless Claims (w/e 14th October)
U.S 15:00 Leading Indicators (September)
U.S 17:00 Philly Fed Index (October)

written by Adam Solomon

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

The Pound received a timely boost yesterday, firming 0.2% against the Dollar and the Euro following a report on the UK housing market, which showed robust growth in the sector with prices jumping 2.0% on the month in October,. bringing the annual growth rate to a 22-month high. According to the Rightmove house price index, the sector continues to expand despite the Bank of England's decision to lift UK interest rates in August and the report yesterday will only increase expectations of a further quarter-point rise next month. There is some hugely significant data released in the UK this morning with the release of the September consumer and retail price index, which are expected to confirm moderating inflationary pressures following a dramatic fall in energy prices over the last quarter. Consumer prices may rise by just 0.1% from August while the annual rate of inflation is widely expected to shrink back towards 2.4%, which is still above the government's 2.0% target for 2006.

The Euro failed to make any gains against the majors yesterday following a distinct lack of fundamental data released in the Euro-zone as we around the resistance level at 1.4850 against the Pound. However, there is some significant economic data released this morning that could potentially reinvigorate interest rate expectations in the region with the release of the harmonised consumer price index. Prices are expected to remain unchanged in September following the initial estimate of 1.8% the previous month and the seemingly moderating inflation concerns correlates with the 25% drop in oil prices since mid-July. Elsewhere, the Euro may receive a boost from a separate report on Euro-zone industrial production, which is widely expected to remain at an elevated level as strong momentum in the manufacturing sector continues to spur economic growth in the third quarter. In addition, the Euro may come under increased pressure this morning following a report on economic sentiment in Europe's largest economy as the ZEW survey is expected to decline further this month, which will raise concerns of moderating economic growth.

The Dollar held firm against the Euro yesterday following a better-than-expected report on manufacturing in the New York area as the Empire State index rose to a reading of 22.9 in October, the highest level in four months. The unexpected increase can be attributed to the recent drop in energy prices and the cost of raw materials and it seems investment will help boost economic growth in the final quarter of this year and in turn weather the housing slump, which threatens to curtail economic expansion. There is a host of significant data released in the States this afternoon with the focus falling on the Producer Price Index, which is widely expected to show a 0.7% drop in prices last month following a sustained fall in the fuel costs. Elsewhere, the Dollar may come under further pressure from a separate report on U.S industrial production, which may show a 0.1% drop in output as producer prices decline for the first time since February.

Data Released 17th October

UK 09:30 Consumer Price Index (September)

EU 10:00 Harmonised CPI (September)
EU 10:00 Industrial Production (September)

GER 10:00 ZEW Expectations Balance (October)

U.S 13:30 Producer Price Index (September)
U.S 14:00 TICs Net Capital Inflows (August)
U.S 14:15 Capacity Utilisation (September)
U.S 14:15 Industrial Production (September)

written by Adam Solomon

Following on from last week, the Dollar continued to remain resilient against the majors following a relatively poor week in terms of economic data with U.S retail sales falling 0.4% in September, which reflects the significant drop in oil prices over the same period. However, the Dollar managed to plough through the major support level at 1.8600 against the Pound and also made gains versus the Euro as renewed interest rate expectations in the States provides a boost. Therefore, this week's round of key data will take on added significance and we can expect a fairly volatile week following the release of the September inflation indices on both sides of the Atlantic. U.S consumer price inflation is widely expected to moderate on the month although the core rate may increase to 2.9% from August, which will keep Fed officials on red alert and do little to ease inflation concerns. Elsewhere, the Tic's report on net capital inflows will be watched closely particularly following August's record high U.S trade deficit although the lack of reaction for the dollar on the release of the trade report suggests the market is being driven by interest rate speculation following renewed inflationary pressures and hawkish commentary from Fed officials. There is some significant economic data released this afternoon in the States with the Empire State index expected to show a drop in U.S manufacturing for October with the headline measure dropping to a reading of 12.0 from 13.8 the previous month.

The Euro has come under intense pressure versus the majors over the past week or so despite the apparent lack of any significant data released in the Euro-zone. However, with the ECB adopting a more cautious approach to monetary tightening over the next month the final estimate of Euro-zone consumer price inflation tomorrow will take on added significance and should confirm inflation at 1.8% year-on-year with a risk of a downward revision to 1.7%. The 25% drop in oil prices since mid-July has pushed inflation under the Central Bank's 2.0% target and the report tomorrow should do little to lift expectations. Elsewhere, the chairman of the ECB, Jean-Claude Trichet, is expected to deliver a speech on how to improve European economic growth this afternoon and his comments may provide a boost to the ailing Euro as we continue to trade up towards 1.4850 against the Pound.

There is a host of significant economic data released in the UK over the next week, which should provide an insight into future interest rate expectations in November with the consumer price index for September, a preliminary report on UK GDP growth in the third quarter and the release of the minutes from the Bank of England's last policy meeting. In particular, the minutes and more specifically the tone of voting on the monetary policy committee will take on added significance as the significant drop in energy prices eases inflation concerns and we can expect at least one member in David Blanchflower to vote against a rise in UK interest rates.

Data released 16th October

U.S 13:30 Empire State Index (October)

written by Adam Solomon

The Dollar stood firm against the majors yesterday despite a worse than expected report on the U.S trade balance, which showed that the deficit in goods and services actually widened to a record $69.9 Billion in August following a significant rise in energy prices for the same period as the shortfall with China reached an all time high. The deficit rose 2.7% from the previous record set in July and exceeded market expectations although the Dollar stood firm against the Euro and the Pound on the release of the data. However, it can be argued that the gap in trade has indeed peaked this year since oil prices have tumbled since August by a startling 25% and therefore, we can expect the gap to narrow in the coming months, which may be the reason for lack of movement in the market. The Dollar has achieved a 3-month high against the Pound this week following a round a very positive economic data and increased speculation that the Federal Reserve will not begin monetary easing in the first quarter of 2007. However, Dollar sellers would be well advised to take advantage of the current rate or at least work a stop order in the market to protect against adverse movement particularly following the poor data yesterday. There is some significant data released in the States this afternoon with Retail Sales widely expected to increase for the third consecutive month in September following a drop in petrol prices and growth in personal income.

The Pound received a timely boost yesterday, firming 0.2% against the Dollar to close just under the resistance at 1.8600 following a report on the UK housing market, which showed that prices had risen to the highest level in four years over the last quarter. Elsewhere, a quarterly report from the British Chamber of Commerce showed healthy growth in the UK economy this year with a significant pick-up in manufacturing bolstering speculation that the Bank of England will lift UK interest rates once before the turn of the year.

The Euro gained 0.2% against the Dollar yesterday despite a distinct lack of any significant economic data although comments made from ECB member, Guy Quaden reiterated concerns of higher inflation, saying a further rise in Euro-zone interest rates was 'very likely' before the turn of the year. The Euro had been under pressure following the soft tone of the press conference last week where Jean-Claude Trichet, the chairman of the Central Bank, failed to use the same language that has become synonymous with signalling a further rate hike the following month. The sole piece of European data yesterday was the final estimate for German consumer price inflation, which came in unchanged 1.0% year-on-year in September.
Data Released 13th October

U.S 13:30 Retail Sales (September)
U.S 13:30 Import Prices (September)
- Export Prices
U.S 13:30 Business Inventories (August)
U.S 14:45 Michigan Sentiment (October Prelim)

written by Adam Solomon

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

The Dollar continued to make substantial gains against the majors yesterday, strengthening 0.5% against the Euro and a further 0.4% against the Pound as we closed under the major support level at 1.8600 for the first time in nearly 3-months. The recent positive sentiment surrounding the Dollar can be attributed to a mixture of strong economic data and hawkish commentary from Fed officials, which has rekindled interest rate speculation in the States. It was widely anticipated that U.S rates would remain on hold for the remainder of this year with the next likely move a cut in early 2007. However, recent comments from Donald Kohn, the Federal Reserve vice-chairman and the seemingly robust gains in the U.S labour market last month has prompted many investors to shift expectations away from a probable cut early next year. It can also be argued that the geopolitical tension surrounding North Korea has boosted the Dollar as investors sought a relative safe heaven in times of uncertainty. There was some significant economic data released yesterday with U.S wholesale inventories, often used as a leading indicator in the retail sector, posting a stronger than expected increase for the month of August at 1.1% despite expectations of a more modest rise towards 0.7%. Without doubt, the focus this evening in terms of economic data will fall on the minutes from the Federal Reserve's last interest rate announcement where policy makers elected to hold the benchmark lending rate at 5.25%. The dramatic slump in the U.S housing market this year will obviously weigh heavily on economic growth in the final three months of 2006 but with gains in employment and comments from Fed officials regarding heightened inflationary pressures, the minutes should provide some insight into the Fed's next move later this month.

The Euro managed to make modest gains against the Pound yesterday and the recent negative sentiment surrounding the single currency can be attributed to underlying Dollar strength rather than Euro weakness as the fundamental data released points to sustained economic growth in the face of rising interest rates. The ECB has lifted rates five times this year and it looks increasingly likely that the Central Bank will raise once more before the turn of the year although the 24% drop in oil prices has pushed inflation below the 2.0% target. There was a distinct lack of economic data released in the Euro-zone yesterday although French industrial production for August rose in line with expectations while manufacturing output reached 0.9% for the same period with a annual rate jumping to 1.0%. The focus this morning in terms of economic data will fall on the final estimate for Gross Domestic Product in the second quarter and the forecast suggests a modest rise to 0.9% while the annual rate of growth could jump up to 2.6%, which will only emphasise the need for a further rise in Euro-zone interest rates before year-end.

The Pound came under intense pressure against the Dollar yesterday, dropping to the lowest level since August as we fell through the major support level at 1.8600 following the release of some surprising weak trade data and a slightly worse than expected report on UK retail sales. The British Retail Consortium released their monthly retail survey yesterday and the report showed that sales we up 2.4% year-on-year in September, which was slightly under expectations although the figure still indicates growth in the sector. Elsewhere, the Pound came under further pressure on the release of the UK global trade balance, which showed that the deficit in good and services narrowed by less than expected in August with exports up from a 13% drop in July. The shortfall in trade came in at £6.7 Billion against expectations of a drop towards $6.3 Billion with exports rising 0.2% in August as a pick-up in global growth boosts demand for British made goods. Recent reports have suggested that trade would be insufficient in supporting economic expansion this year, which has added to doubts about whether the Bank of England will raise interest rates in November.

Data Released 11th October

EU 10:00 Final GDP (Q2)

U.S 19:00 Fed Issues Beige Book
U.S 19:00 FOMC Minutes of the 20th September meeting

written by Adam Solomon

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

Following on from last week, the Dollar continued to make steady gains against the Euro and the Pound on Friday following an upward revision of the August nonfarm payrolls numbers, although the September report showed that the economy added much fewer jobs than anticipated last month. The initial reaction saw the Dollar decline against the majors as the monthly report showed a modest increase of 51,000 jobs last month against expectations of a rise towards 123,000. However, the momentum shifted when the report also highlighted improvement in U.S unemployment, which actually shrank to 4.6% in September while the average hourly wage also showed a 0.2% rise. The focus this week in terms of economic news will fall on the minutes from the Fed's last policy meeting due for release on Wednesday and the report should provide an insight into the Fed's thinking in the build up to the next FOMC rate announcement later this month. The minutes are expected to portray the Fed's view of slowing economic growth while also acknowledging the risks of higher inflation. Elsewhere, the Dollar may come under pressure later this week with the release of the U.S trade data for August and it is widely expected that the deficit in goods and services will show a modest improvement from July's record $68 Billion shortfall.

The Euro failed to make any significant gains against the Pound or the Dollar last week despite the ECB's decision to lift Euro-zone interest rates for the fifth time this year although the tone of the press conference was somewhat subdued with regards a further tightening of rates later this year. In the accompanying press conference, the market was looking for a clear indication that policy makers would be raising rates by a further quarter-point to bring borrowing costs upto 3.50% by year-end. However, the chairman, Jean-Claude Trichet, dropped the term 'vigilant from his statement and it seems that although the Central Bank look likely to raise rates in December, the ECB will adopt a 'wait and see policy' over the next month as a 24% drop in oil prices dampens inflationary pressures. There has been some positive data coming of Germany in recent weeks and following an unexpected rise in German manufacturing orders, we can expect a strong report this week on German industrial production, which is expected to show year-on-year growth at 5.9% in August. Elsewhere, there has been some significant data released this morning that has continued to weigh on Euro sentiment as German exports unexpectedly fell in August as demand from overseas moderated in the face of slowing U.S economic growth.

The Pound remained relatively firm against the Euro despite the Bank of England's decision to leave UK interest rates on hold at 4.75% this month although last week's data suggests a probable hike in rates in November. Growth in manufacturing and the service sector continues to bolster economic growth while the housing market continues to show robust gains despite a surprising rise in borrowing costs in August. There is a sparse supply of economic data released in the UK this week but the Pound may receive a boost from the British Retail Consortium's survey, which is expected to show strong growth in sales for September. Elsewhere, the Pound may come under pressure from a report on the UK global trade balance, which unexpectedly widened in July with exports posting a massive 13% drop from June and if the report this Wednesday shows that the deficit has widened further, we can expect the Pound to decline as it will seem increasingly unlikely that trade will be unable to support growth. The focus in terms of economic data today will fall on the UK Producer Price Index where input prices may continue to portray moderating inflationary pressures while output prices are expected to drop from 2.6% year-on-year in August to 2.0% last month.

Data Released 9th October

UK 09:30 Producer Price Index (September)
UK 09:30 DCLG House Prices (August)

GER 11:00 Industrial Production (August)

written by Adam Solomon

The Pound declined against the majors yesterday, dropping 0.3% against the Euro and a further 0.5% versus the Dollar following the Bank of England's decision to hold UK interest rates at 4.75% this month as a 24% drop in oil prices since mid-July eased inflationary pressures. It was widely anticipated that the MPC would leave rates unchanged for a second month in succession but the Pound declined as the market reacted with disappointment after factoring in a 30% probability of a surprise rate hike this month. We will have to wait until the 18th of October for the minutes of the meeting to be released where the market will be looking for further evidence of a possible rise in UK interest rates in November. Inflation still remains well above the government's 2.0% comfort zone and above-average economic growth has prompted speculation that policy makers including the governor of the BoE, Mervyn King, will raise rates by a further 25 basis points before the turn of the year. There is some significant economic data released in the UK this morning with industrial production expected to increase by 0.1% in August while manufacturing output is likely to increase to 1.4% year-on-year from 1.0% in July.


The Euro lost ground against the Dollar yesterday, dropping by 0.3% despite the European Central Bank's decision to lift Euro-zone interest rates for the fifth time this year as growth in the economy accelerated at the fastest pace since 2000 this year. Policy makers decided to lift rates by a further quarter-point to 3.25% despite recent reports suggesting inflation had dropped below the Central Bank's 2.0% target following a significant drop in energy prices. However, the move had been widely anticipated and the accompanying press conference would always take on added significance as the market looks to gauge whether the ECB will lift rates once more in December. However, the tone and rhetoric of the press conference was far less aggressive than in previous months as the chairman, Jean-Claude Trichet, dropped the term 'vigilance' from his statement. He has used this terminology as a trigger to the market that policy makers intend to raise rates the following month and therefore, we can discount the possibility of a rise in Euro-zone interest rates in November. Instead, Trichet went on to say that the Central Bank will 'monitor the inflation risk very closely' over the coming months and also stated that the current lending rate is still relatively low despite going from 0.25% to 3.25%. Therefore, it seems the ECB will perhaps raise rates in December but will adopt a more cautious approach over the next month or so and as a result, any Euro gains will be limited.

The Dollar made significant gains against Sterling yesterday, firming by 0.5% to close around the trend support at 1.8750 last night. There was a distinct lack of fundamental data released in the States yesterday but the positive sentiment surrounding the Dollar continued following a report from the U.S labour market on initial jobless claims. The number of people out of work and claiming benefits fell by more than expected in the last week, which perhaps provides an insight into the monthly job report this afternoon. Initial claims fell by 17,000 from the previous week to 302,000, the lowest since the final week in July. The Dollar may make further gains today and test the major support level around 1.8600 following the release of U.S nonfarm payrolls this afternoon where it is widely anticipated that the economy added 123,000 jobs in September while the average hourly earnings may increase by 0.3% and the unemployment rate remains unchanged at 4.7%.

Data Released 6th October

UK 09:30 Industrial Production (August)
- Manufacturing Output

U.S 13:30 Nonfarm Payrolls (September)
- Unemployment Rates
- Average Hourly Earnings

written by Adam Solomon

The Pound held firm against the Euro yesterday following a better than expected report on the UK Service sector, which increased in September after declining for four consecutive months with input and output prices falling back in line with other recent revisions on consumer price inflation. The manufacturing and service sector reports this week have both shown robust growth in the last month, which has only fuelled speculation that the Bank of England will raise interest rates this year with the next scheduled announcement at midday today. It is becoming increasingly difficult to successfully predict whether the BoE will lift interest rates this month but in light of the recent omission from the Office of National Statistics, we can expect the MPC to hold rates in October and adopt a 'wait and see' policy with a probable hike in November. In addition, a 20% drop in oil prices since mid-July has eased inflationary pressures and all of these factors concerned, we expect the Central Bank to keep rates steady at 4.75%. However, we can never discount the possibility that the BoE will indeed raise interest rates today particularly following the surprise rise in interest rates in August and if that scenario was repeated this month, we can expect the Pound to make significant gains against both the Euro and the Dollar. The minutes from the meeting will be released on the 20th October and investors will have to wait until then to gauge how the eight-strong committee voted.

The Euro came under pressure against the majors yesterday, falling 0.1% against Sterling and a further 0.4% versus the Dollar after the purchasing manager's index on the European service sector fell by more than expected last month primarily due to a rise in unemployment and higher borrowing costs. The index fell to a reading of 56.7 in September, which is the lowest reading in the last 10-months although a level above 50 indicates growth and the report is unlikely to stop the ECB from raising Euro-zone interest rates at midday today. Rising rates and a planned tax increase in Germany next year is clouding the economic outlook while the International Monetary Fund expects Euro-zone growth to slow to 2.0% next year while a significant drop in energy prices has pushed inflation back below the Central Bank's comfort zone. The European Central Bank are notoriously transparent in terms of monetary policy and following the tone of the press conference last month, we fully expect interest rates to be lifted by a further quarter-point to 3.25%. While inflationary pressures are seemingly moderating, the economy has expanded at the fastest pace since 2000 this year, which may prompt the ECB to raise rates beyond this month. Therefore, the tone and language used in the accompanying press conference this afternoon will take on added significance and if the chairman, Jean-Claude Trichet, reiterates that 'strong vigilance' is still required, we can expect the Euro to strengthen significantly as speculation mounts of a further rate hike in December.

The Dollar made gains in early trading yesterday following comments from the president of the Kansas City Reserve bank, Thomas Hoeing, who reiterated that U.S inflation was still too high in a seemingly vain attempt to rekindle interest rate speculation. However, by mid-afternoon the Dollar had relinquished much of the gains against Sterling after a report from the Institute of Supply and Management showed a larger than expected drop in activity in the U.S service sector. Industries expanded at the slowest pace in more than three years last month, which correlates with the dramatic slump in the housing market this year. The non-manufacturing index fell to a reading of 52.9, the lowest level since April 2003, and the report will only emphasise concerns that the U.S economy is losing momentum going into the fourth quarter as the service industries account for almost 90% of gross domestic product. The Dollar came under further pressure against the Pound as a separate report showed factory orders and production is also slowing, excluding transportation, orders fell 0.7% in August, the biggest drop in 6-months.

Data Released 5th October

UK 12:00 Bank of England Interest Rate announcement

EU 12:45 European Central Bank Interest Rate announcement

U.S 13:30 Initial Jobless Claims (w/e 30th September)

written by Adam Solomon

The Euro made further losses against the Pound yesterday as unemployment in the Euro-zone rose for the first time since November 2003 as concerns of a slowing economy means companies are reluctant to continue hiring. The jobless rate increased to 7.9% in August, marginally higher from 7.8% the previous month and as a result, the Euro fell a further 0.2% against Sterling to close above 1.4800 last night. Following a 20% drop in oil prices since mid-July it was perhaps no surprise to see Euro-zone inflation dropping below the Central Bank's 2.0% comfort zone and yesterday a report on producer prices also showed moderating inflationary pressures that may alter interest rate expectations in the twelve nations sharing the Euro. We fully expect the ECB to lift their benchmark interest rate tomorrow by a further quarter-point, particularly since the robust growth in the manufacturing sector continues to bolster economic growth, but the tone of the press conference may be slightly less vigilant on a further rate increase before the turn of the year. There is some significant economic data released in the Euro-zone this morning with the purchasing manager's report on the service sector and we expect the index to remain at an elevated level in September following a reading of 57.1 in August. Elsewhere, the Euro may receive a timely boost on the release of Euro-zone retail sales for the month of August and the consensus forecast is for a rise towards 0.7% from the previous month as consumers hit the high-street before the value-added tax increase in Germany takes effect at the start of 2007.

The Pound remained firm against the majors yesterday, increasing by 0.1% against the Dollar despite a fundamental lack of any significant data released in the UK but this morning a report from the Nationwide Building Society has shown that consumer confidence improved last month, despite the Bank of England's surprise decision to lift UK interest rates in August. However, confidence amongst the consumer still remains relatively low in the UK and higher borrowing costs combined with more expensive utility growth will only dampen sentiment over the coming months. Elsewhere, a separate report on the UK housing sector showed that prices rose for a third month in succession, which only emphasises previous reports that the sector has managed to absorb higher interest rates and will continue to show sings of growth. There is also some significant economic data released in the UK this morning with the CIPS services survey expected to mirror the report on manufacturing earlier this week and increase from a reading of 56.7 in August, which will only add to speculation that the Bank of England have the scope to raise UK interest rates to 5.0% before the turn of the year.

The Dollar declined against both the Euro and the Pound yesterday as the market anticipates a further tightening of monetary policy in other leading economies while the next likely move for the Federal Reserve will be cut in U.S interest rates early next year. The Dollar has been in rapid decline particularly since the report from the institute of supply and management on Monday, which showed that U.S manufacturing fell to the slowest pace in 16 months in September, emphasising concerns that economic growth will continue to slow in the fourth quarter. Therefore, the monthly job report on Friday will take on added significance and we can expect the Dollar to decline further if nonfarm payrolls comes in below market expectations. The focus today in terms of economic data will the ISM non manufacturing index and it is widely anticipated that the service sector expanded at a much slower pace last month, which correlates with a dramatic slowdown in the housing market and consumer spending. Elsewhere, U.S factory goods orders may also show a drop of roughly 0.2% for the month of August while the ADP employment report will provide an insight into the labour market ahead of the monthly job report on Friday.

Data Released 4th October

UK 09:30 CIPS Services Survey (September)

EU 10:00 PMI Services (September)
EU 10:00 Retail Sales (August)

U.S 13:15 ADP Employment Report (September)
U.S 15:00 ISM (Non Manufacturing) Index (September)
U.S 15:00 Factory Goods Orders (August)

written by Adam Solomon

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

Following on from last week, the Pound came under intense pressure against the majors following a revised report from the Office of National Statistics where it was announced that an error had been made in one of their inflation models, leasing to an incorrect measure of UK national income in the second quarter. Sterling dropped by 4 cents against the Dollar over the course of the week and fell back towards 1.4750 versus the Euro as the revised estimate suggested that the August rate hike wasn't entirely justified and has therefore had a negative impact on interest rate expectations for October. The focus this week in terms of economic events falls on the Bank of England interest rate announcement on Thursday and although the decision is finely balanced in light of updated forecasts on growth and inflation, we can expect the Monetary Policy Committee to hold interest rates this month in favour of a probable rise in November. As a result, the Pound may come under further pressure this week and the data released will take on added significance with the CIPS manufacturing survey released this morning and the consensus forecast suggests a softening of global economic activity in the last month. However, UK manufacturing output and industrial production data is due on Friday and is expected to show a year-on-year increase of 1.4% for the month of August.

The Euro made significant gains against Sterling last week despite a damaging report on the flash estimate consumer price index, which showed that Euro-zone inflation dropped below the ECB's 2% target for the first time since January 2005 as oils prices fell from a record level. Core prices rose just 1.8% from a year earlier in September, the slowest increase since March 2004 following a 20% drop in oil prices since mid July. However, the report has not clouded expectations of a further rate hike this week and we fully expect the European Central Bank to lift interest rates by a further quarter-point to 3.25% in their monthly announcement on Thursday. It can be argued that the impending rise in rates is already factored into the market and therefore, the following press conference will take on added significance as investors look for an insight as to whether the Central Bank will raise rates again in December. The chairman, Jean-Claude Tricht, has adopted a fairly hawkish rhetoric in previous statements and following a significant drop in oil prices, the market will be looking for a softening of the tone in order to gauge whether the ECB will raise rates to 3.50% before year-end. There is some significant data released in the Euro-zone this morning with the Purchasing Manager's report on Manufacturing expected to remain at elevated levels for the month of September suggesting continued growth in the sector.

The U.S Dollar enjoyed a sustained rally against the Pound last week as we dropped back towards the major support at 1.8640, which was the lowest point of the previous downside move. The positive sentiment surrounding the Dollar continued on Friday following a report on U.S personal income and expenditure, which showed that consumer spending had risen by just 0.1% in August while the PCE Deflator, the Fed's preferred measure of inflation, actually rose by 0.2% with core prices up 2.5% year-on-year, the biggest annual increase since April 1995. The report highlighted persistent inflationary pressures and may rekindle speculation that the Fed may need to raise interest rates once more before the turn of the year. However, from a technical perspective the major support level at 1.8640 held firm against the Pound and we have failed to break that level in the two previous downside moves. Therefore, Dollar sellers would be well advised to take advantage of the renewed strength or at least work a stop order around 1.8750 to protect against any adverse market movement. Without doubt, the focus this week in terms of economic data will be the monthly job report on Friday where nonfarm payrolls are expected to show an increase of 123,000 jobs in September while the unemployment rate is expected to remain unchanged at 4.7%. There is some significant data released this afternoon in the States with the ISM manufacturing report expected to show a modest drop towards a reading of 53.3 last month while construction spending may show a 0.2% rise in August.

Data Released 2nd October

UK 09:30 CIPS Manufacturing Survey (September)

EU 09:00 PMI Manufacturing (September)

U.S 15:00 Construction Spending (August)
U.S 15:00 Pending Home Sales (August)
U.S 15:00 PMI Manufacturing (September)

written by Adam Solomon