Daily Insight

Following on from last week, the Pound fell to the lowest level in well over a year versus the Euro and has also fallen through the $2.00 barrier against the U.S Dollar after the UK mortgage lender, Northern Rock, received the largest amount of emergency funding in over 30 years.

As a result, the Pound posted its biggest weekly decline in nearly two years against the Euro as the credit crunch surrounding Northern Rock forced the lender to seek emergency cash from the Bank of England in order to ease a "severe liquidity squeeze."

The subsequent reaction from the general public is likely to cause a significant drop in consumer confidence over the coming months and that may increase speculation that the monetary policy committee may need to cut interest rates early next year.

The focus this week will fall largely on the minutes from the Bank of England's last policy meeting where the voting pattern of the committee will be revealed in addition to the tone of the discussions. The nine-strong panel are widely expected to have voted unanimously to hold interest rates in September given the problems surrounding financial markets.

Since breaking through the trend support last week, the Pound dropped 2.0% versus the Euro by the close of trading on Friday while the market is now looking particularly "over-sold" and therefore a technical bounce is likely over the coming days.

The Euro has made strong gains against the majors over the past week as the diverging interest expectations between Europe and the U.S sent the pair to a fresh record high on Thursday.

The single currency also rose an incredible 2.0% versus the ailing Pound as a number of hawkish statements from ECB officials increased speculation that the governing council will lift interest rates again this year.

In the short-term the market is now taking an oversold position and we can expect a sharp bounce upwards over the next few days. However, the technical picture still points to further downside movement and any hint of a UK rate cut could send the Pound
under 1.4200 for the first time in over 2-years.

There is a fundamental lack of economic data released this week with the focus falling on the German ZEW expectations balance while the market will also pay particular attention to ECB comments on Friday with a number of members due to speak including the Chairman, Jean-Claude Trichet.

The decline of the Pound has helped the Dollar penetrate the $2.00 level this morning but the U.S currency continues to struggle against the Euro amid speculation that the Federal Reserve will cut U.S interest rates tomorrow night.

Following on from last week, the Dollar was also hampered by reports that retail sales growth rose less than initial forecasts in August with sales rising just 0.3% from July. The report from the Commerce Department will only add to calls for an interest rate cut this week and the Fed are expected to ease rates by 0.25% with the tone of the statement also indicating further cuts in the pipeline.

There is also a plethora of significant economic reports released this week with the focus falling on the latest consumer price data, which is expected to show that the annual rate of inflation has dropped to 2.2% in August.

Data Released 17th September

EU 10:00 Trade Balance (July)

U.S 13:30 Empire State Index (September)

written by Adam Solomon