Daily Insight

The Dollar fell modestly against the Pound yesterday but stood firm versus the Euro despite a report on U.S consumer sentiment, which showed that confidence had dropped by the most in two years this month. The Conference Board's index fell to a reading of 105.0 from 111.9 the previous month and although the report matched initial forecasts, the Dollar dropped amid speculation that spending growth may stall after a housing-induced credit market slump. Although the report fell largely in line with expectations, the New-York based confidence index is the first indicator to reflect the increase in the cost of borrowing this month and underlines the Fed's concerns that risks to economic growth have "risen appreciably". Despite the latest spate of economic reports, the Dollar's decline was short-lived as the uncertainty surrounding financial markets continues with the Dow Jones falling 280 points over the course of the day. In addition, the minutes from the Federal Reserve's last policy meeting exacerbated the liquidation of U.S stocks. The tone and language used in the report did not contain any surprises as the last meeting was held before the emergency conference call on the 17th August where the Fed cut the discount lending rate in order to bring stability to the market.

The Pound traded marginally higher against the Dollar yesterday and also rose steadily versus the Euro despite a particularly negative report from the British Bankers Association, which showed that UK lenders approved fewer mortgages in July. The report yesterday provides the latest indication that five interest rate increases in a year is starting to cool the UK housing market after a separate report showed that house prices were unchanged in August, the worst performance since November 2005. The Bank of England elected to keep rates unchanged at 5.75% this month, the highest level in six years, and stated that the property market is showing signs of "softening" amid moderating inflationary pressures and deteriorating consumer sentiment.

Amid the renewed uncertainty surrounding financial markets, the Euro was pushed lower against the Dollar by the close of trading last night as the appetite for risk aversion increased and traders returned to the relative "safe haven" currencies. In addition, the single currency fell for a second consecutive day as German business confidence declined to the lowest level in 10-months after the turmoil in the credit market clouded the outlook for European economic expansion. The Ifo sentiment index declined to a reading of 105.8 from 106.4 in July, which was slightly better than expected amid reports that German investor confidence had fallen to an eight month low over the same period. Concerns over the U.S subprime mortgage crisis has pushed up the cost of credit and made borrowing more difficult for companies while a separate report this morning has showed that German consumer confidence declined for the time in six months.

Data Released 29th August

GER 07:00 Gfk Consumer Confidence (September)

written by Adam Solomon