Daily Insight

The Pound continued to decline against the majors yesterday, briefly falling through the major support level of 1.4250 versus the Euro to record the lowest level of exchange since April 2006 despite a slightly stronger-than-expected report on the UK economy.

The final estimate of gross domestic product showed that economic growth had accelerated 3.1% in the second quarter with the upward revision coming from the expansion in services and a pick-up in manufacturing.

Therefore, the UK economy is heading for the fastest pace of expansion in three years but may begin to slow in 2008 following the collapse of the U.S subprime mortgage market, which has caused turmoil in financial markets around the world.

Despite the seemingly positive report on the UK economy, the Pound declined against both the Euro and the Dollar amid reports that commercial Banks in the UK sat out the Bank of England's three-month money auction and neglected to borrow emergency funds at a penalty rate.

The government was forced to release a significant amount of liquidity earlier this month in response to uncertainty surrounding the UK's fifth biggest mortgage lender, Northern Rock plc. However, the report yesterday shows that bank's may be finding it easier to borrow money after market interest rates fell to the lowest level since the start of the credit market slump.

The Euro rose to yet another record high against the ailing U.S Dollar yesterday despite reports that business confidence has suffered greatly as a result of the recent turmoil in financial markets, the U.S economic slowdown, and the prospect of a further tightening of Euro-zone interest rates.

Newspapers across Europe have highlighted the risks that a strong currency will have on the economy as a whole, particularly demand from overseas, with Europe being a largely export dependent nation.

Reports this morning showed that consumers are also becoming overly pessimistic as European retail sales slowed dramatically in September, led by the sharpest drop in Italy for two years.

An gauge of retail growth slipped to a seasonally adjusted 50.5 this month from 51.0 in August as European consumers are becoming more reluctant to increase spending after the rising cost of credit clouded the outlook for economic expansion.

The Euro may continue to test the major support levels against the Pound and look to make new record highs versus the Dollar amid the release of the preliminary estimate of German consumer prices, unemployment and Euro-zone money supply.

The relentless decline of the U.S Dollar has continued over the past trading session as the U.S currency fell to a record 1.4160 against the Euro and has also traded back above 2.0200 versus the Pound ahead of the latest round of housing numbers this afternoon.

In terms of economic data, the Dollar came under renewed pressure yesterday as a report from the Commerce Department showed that U.S durable goods orders had fallen by the most in seven months in August.

Orders had declined by more that the 4.9% anticipated after a revised 6.1% gain the previous month as industrial demand looks set to cool even as exports climb and inventories remain reduced.

Elsewhere, the Dollar stayed on the back-foot as speculation continues to mount that the Federal Reserve will be cutting interest rates again this year with Fed fund futures currently pricing in a 70% chance of a rate cut in October.

The report this afternoon on new home sales will go a long way to confirming or denying that assumption with sales expected to fall to the lowest level in seven years in August. Purchases of new property may fall to an annual rate of 825,000 last month as the report follows an earlier index of existing home sales, which dropped to a five-year low over the same period.

Data Released 27th September

UK 11:00 CBI Distributive Trades (September)

GER 09:00 Unemployment (September)

EU 09:00 M3 / 3 Month Moving Average (August)

U.S 13:30 GDP / Deflator (Q2)

U.S 15:00 New Home Sales (August)

written by Adam Solomon