Daily Insight

In the build-up to the release of the FOMC minutes last night, the renewed appetite for the Dollar saw the U.S currency make further gains against both the Euro and the Pound as Fed policy makers were expected to provide some insight into future policy.

Unfortunately the report failed to deliver any sort of cohesive market activity as the Dollar surprisingly lost ground against Sterling and the Euro, although the reaction in bond markets clearly showed that the minutes should be interpreted as positive for the Dollar.

The tone and language used in the report last night seems to suggest that the Federal Reserve are in no hurry to reduce interest rates again amid signs that the U.S economy will continue to expand.

The Federal Open Market Committee seemingly wanted to avoid a pre-emptive move in the market after lowering interest rates by 50 basis points in September.

A recent spate of positive economic reports have justified their caution as growth in manufacturing and service industries has continued to expand over the past month. As a result, the chances of a further cut in rates this month have been severely reduced as a weak Dollar and higher oil prices may stoke the already persistent inflationary concerns.

Therefore, the U.S currency may rebound sharply against both the Euro and the Pound over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate or at least place a stop order to protect against a downward move.

The Euro managed to rebound against the Pound and the Dollar yesterday after dropping to a two-week low versus the U.S currency amid growing concerns over the current strength of the Euro and the subsequent effects on economic growth.

Nevertheless, the latest comments from Germany's finance minister, who explicitly indicated that he supports a strong currency, seems to suggest that at least parts of the Euro-zone are undeterred with the current level of the Euro.

That sentiment was reflected in a report on the German trade balance, which showed that exports rose by the most in almost a year in August. Overseas sales rose 3.0% from July, the biggest gain since September 2006, as global economic growth helped companies cope with rising oil prices and a strong Euro.

The significance of the regional reports will probably encourage the European Central Bank to retain a tightening bias with regards monetary policy and feel comfortable raising interest rates beyond the current 4.0%.

The Pound dropped to a low of 2.0257 versus the Dollar before a sharp intraday reversal sent the UK currency back towards 2.0350 by the close of the European session.

The move appears to be largely driven by the surprising weakness in the Dollar since it occurred a long time after the UK trade balance. The deficit in goods and services unexpectedly narrowed by less than initial forecasts in August while elsewhere, the Chancellor maintained the government's 2007 growth forecast of 3.0%.

However, a statement from the Bank of England governor, Mervyn King, may have renewed Sterling sentiment as he suggested that the Central Bank would be reluctant to cut interest rates just to protect mortgage lenders from increased credit costs.

In a speech in Northern Ireland yesterday, King emphasised that the current turmoil in financial markets is far from over but that the main objective for policy makers would be to keep inflation close to the 2.0% target. The BoE have lifted UK rates on five separate occasions over the past year, which has seen consumer price inflation fall from a decade high of 3.1% in March to just 1.8% in September.

Data Released 10th October

U.S 15:00 Wholesale Inventories (August)

written by Adam Solomon