Daily Insight

The Pound declined heavily against the Euro yesterday, plummeting through the major support level at 1.4650 and also made losses versus the Dollar amid speculation that UK interest rates will remain on hold for the remainder of the year.

The Governor of the Bank of England, Mervyn King, remained defiant yesterday and refused to relax the Bank's stringent policy of loaning money below the base rate in order to provide some relief to commercial bank's and prevent a credit crisis.

In a written testimony to the UK Parliament's Treasury Committee, King outlined that the provision of extra liquidity encourages excessive risk taking and "sows the seeds of a future financial crisis". The Bank of England have so far been more reluctant than the U.S Federal Reserve or the ECB who between them have released over $400 billion in emergency funds to help banks cope with the collapse in the Subprime mortgage market.

In terms of economic data, the Pound failed to find any support as the UK claimant count showed that unemployment had declined to lowest level in over two years last month. The report points to broad-based growth in the economy while average hourly earnings rose significantly in the three months through July, stoking inflationary concerns.

The heightened concerns surrounding the U.S economy continued to hamper Dollar sentiment yesterday as the U.S currency fell to a fresh record low versus the Euro, trading above 1.3900 by the close of trading last night.

The speculation surrounding U.S interest rates continues to be the driving force in the market and with the Fed likely to reduce the benchmark lending rate in a matter of days, the shrinking gap between the U.S and Europe is pulling investors out of the Dollar.

In addition, the U.S currency declined for a sixth straight day, which represents the longest losing steak since April, after the National Association of Realtors cut its home sales forecast this year amid concerns that the housing slump is spreading to other areas of the economy.

U.S existing home sales have fallen 8.6% this year, exceeding initial estimates only a month ago while new-home sales are projected to decline 24% on top of an 18% fall in 2006.

Growth in the labour market has propelled consumer spending this year, which has seen the economy expand at a moderate pace but following the nonfarm payrolls report last week, the Dollar has fallen over 1% amid speculation that the Fed will need to shed interest rates by 50 basis points.

The positive momentum surrounding the Euro has continued to gather pace as the single currency looks evermore likely to test the 1.4000 level against the Dollar while also sailing through the trend support at 1.4650 versus the Pound.

An unexpected rise in European industrial production saw the pace of activity jump a massive 0.6% in July while labour costs also rose from an upwardly revised 2.3% to 2.5% in the second quarter.

The overwhelming strength of the Euro can be sourced from the diverging monetary policy outlooks in the U.S and the Euro-zone as the ECB look to retain a tightening bias and the Fed prepare to cut interest rates later this month.

In addition, it seems that a strong Euro has had a much more muted affect on exporters than earlier in the year amid suggestions from Germany that the Euro's dramatic appreciation against the Dollar won't have a negative impact on the economy.

Data Released 12th September

EU 09:00 ECB Monthly Bulletin Published

U.S 13:30 Initial Jobless Claims (w/e 8th September)

written by Adam Solomon