Daily Insight

The Pound continued to decline against the Euro yesterday, trading through 1.4300 as we look set to test the major support level at 1.4250, the lowest since April 2006, amid growing evidence that the Bank of England will eventually need to cut UK interest rates.

Although the fiasco surrounding Northern Rock has been the catalyst to a major sterling sell-off, a report yesterday indicated that the Bank of England was already concerned about the outlook for the economy and inflation even at the beginning of the month.

Earlier this week, the latest round of inflation numbers showed that consumer prices had dipped again in August while the Bank of England released a statement yesterday saying that the upside balance of risk to inflation had receded.

The minutes from the Bank's last policy meeting showed that the monetary policy committee had voted unanimously to hold interest rates in September, saying that "the outlook was now more uncertain".

The particularly dovish tone of the accompanying statement seems to suggest that the MPC are shifting towards a possible rate cut by the turn of the year as the impact from the credit crisis continues to weigh on sentiment. As a result, the Pound is falling against the majors and is likely to continue to downward momentum ahead of a report this morning, which is expected to show that retail growth failed to accelerate in August.

The Euro has risen to the highest level in almost 18-months versus the Pound and overnight we broke through the 1.4000 barrier against the U.S Dollar to record a fresh all-time high of 1.4065.

Despite the increased level of volatility in financial markets throughout the world, the European Central Bank has retained a tightening bias and the diverging interest rate expectations in Europe and the U.S is making the single currency a far more attractive and somewhat safer commodity than the Dollar.

In addition, economic fundamentals in Europe remain positive with the only piece of data released yesterday showing that producer prices slowed modestly in August. The report represents an early indicator of price pressures in Germany, which were largely in line with initial forecasts, rising 1.0% from this stage last year led by lower costs for energy.

In the wake of the Fed's decision to lower U.S interest rates by half a percentage point, the Dollar has plummeted to a fresh record low against the Euro and pushed back through the $2.00 barrier versus the Pound.

The U.S currency fell against 15 of the 16 most active currencies in the market yesterday amid speculation that the Federal Reserve will cut the benchmark lending rate further after the first reduction since June 2003.

The Dollar also came under intense pressure ahead of a speech from the Fed chairman, Ben Bernanke, later today who is expected to tell a congressional hearing that the U.S housing slump is threatening the pace of economic growth.

Elsewhere, a spate of economic data also hampered dollar sentiment as U.S consumer prices unexpectedly fell for the first time in a year last month following a decline in fuel costs. The report from the labour department showed that prices decreased 0.1% in August as slowing growth and weaker consumer spending are keeping companies from increasing prices.

Data Released 20th September

UK 09:30 Retail Sales (August)

UK 11:00 CBI Monthly Trends Survey (September)

U.S 13:30 Initial Jobless Claims (w/e 22nd September)

U.S 15:00 Leading Indicators (August)

U.S 17:00 Philly Fed Index (September)

written by Adam Solomon