Daily Insight

The Pound continued to decline for the fourth straight day against the Dollar, dropping through the $2.00 barrier while also falling below 1.4400 versus the Euro as the impact of the credit crunch surrounding Northern Rock and other financial institutions continues to weigh on sentiment.

The overwhelming decline of the Pound looks set to continue this week despite the best efforts of the UK Chancellor, Alistair Darling, who announced yesterday that the government will guarantee all deposits of Northern Rock account holders.

However, his comments did little to ease concerns and the wave of depositors withdrawing savings from UK banks, including Northern Rock, provides an indication that consumer confidence has been hit hard from this financial crisis.

As a result, the Bank of England have little choice but to lean towards monetary easing over the coming months although the latest assurances from the government will probably see interest rates remain on hold until the first quarter of 2008.

In terms of economic data, the focus this morning will fall on the latest round of inflation numbers with consumer prices expected to drive higher over the last month following the significant rise in oil prices and the drop in Sterling. The annual rate of UK inflation fell below the 2.0% threshold in July, dropping 0.6% from the previous month after the Bank of England raised interest rates on five separate occasions over the past year.

The positive sentiment surrounding the Euro continued to gather momentum yesterday as the single currency traded at a near-eighteen month high versus the Pound and also hovered near the record highs against the Dollar.

The German ZEW survey for business confidence is due for release this morning and is expected to show a sharp drop in sentiment as the volatility in credit markets drives borrowing costs higher. The German economy is heavily reliant on export growth, making Germany vulnerable to a global slowdown and although this should be negative for the Euro, the impact should be limited.

The focus today will inevitably fall on the FOMC interest rate announcement this evening and it will be viewed as a crucial event in terms of direction of the Dollar over the coming weeks.

The impact of the U.S subprime mortgage crisis on global financial markets has seen the market anticipate the first adjustment in U.S monetary policy in over a year with the Fed expected to cut interest rates by at least 25 basis points.

However, Fed fund futures are currently pricing in a greater than 50% chance that policy makers will reduce the benchmark lending rate by half a percentage point and anything less than this could prove a disappointing outcome and limit the Dollar's decline.

The chairman of the Fed Reserve, Ben Bernanke, has the unenviable task of weighing up the risks of a recession against shrinking investor confidence and while a quarter-point reduction may not be enough to bolster growth, a half a point cut may fan inflation.

Data Released 18th September

UK 09:30 Consumer Price Index (August)

- Retail Price Index

GER 10:00 ZEW Expectations Balance (September)

U.S 13:30 Producer Price Index (August)

U.S 14:00 TICs - Net Capital Inflows (July)

U.S 18:00 NAHB Housing Market Index (September)

U.S 19:00 FOMC Rate Announcement

written by Adam Solomon