Daily Insight

The Dollar fell to the lowest level in almost 30-years versus the Pound yesterday and also traded near the all-time highs against the Euro as we build up to the FOMC interest rate announcement this evening.

The decision from the Federal Reserve has been greatly debated over the past few weeks with Fed Fund Futures currently pricing in a 98% probability of a rate cut.

The Dollar has declined significantly in the run up to the announcement amid persistent speculation that policy makers may lower borrowing costs by half a percentage point. The Fed will either acknowledge the downside risks to economic growth or choose to focus almost exclusively on inflation with oil prices still holding above $90 a barrel.

Recent economic reports have shown that consumer spending continues to prop up the economy while the latest round of housing data showed that the slump in the property market shows few signs of abating.

Therefore, the most likely scenario is that the Fed will cut rates by 25 basis points this month and adopt a neutral stance in the accompanying statement, which may prove positive for the U.S Dollar.

Prior to this evening's announcement, the market will be paying particular attention to the advanced GDP report for the third quarter, which is expected to show that economic growth slowed in the three months through to September.

Dollar buyers would be well placed to take advantage of the current rate or at the very least place a stop order in the market to protect against an adverse move this evening.

The diverging interest rate expectations between Europe and the U.S has seen the Euro consolidate above 1.4400 although the single currency made further losses against the Pound as European retail sales declined for the first time in three months.

The index showed that sales fell to a seasonally adjusted reading of 47.9 in October from 50.5 the previous month with a figure below 50 indicating a contraction.

In recent months, consumer price inflation has risen above the ECB's 2.0% target and rising food and energy prices are beginning to weigh on consumer confidence.

The report yesterday will be of concern to policy makers as slowing consumer spending, which accounts for roughly 60% of the European economy, may exacerbate an economic slowdown.

Elsewhere, the Euro received an unexpected boost as reports in Germany continue to surprise to the upside with unemployment dropping to 8.7%, the lowest level since 1993.

The Euro may make further gains against the Dollar this morning as the focus switches to the harmonised index of European consumer prices, which is expected to show that inflationary pressures accelerated in October.

The Pound rallied for a fifth straight day against the Dollar yesterday, rising to the highest level since June 1981 amid speculation that a Fed rate cut would increase the difference in borrowing costs between the U.S and the UK.

Amid slowing economic growth and a worsening housing slump the Fed will reduce the benchmark lending rate to 4.5% while UK policy maker, Kate Barker, yesterday signalled that the Bank of England has no plans cut UK rates from the current 5.75%.

Despite the fundamental lack of economic data, the hawkish tone of the statement from the BoE saw the Pound extend gains against 12 of the 16 most actively traded currencies.

In addition, the positive sentiment surrounding the UK currency continued this morning as a report from the Nationwide Building Society showed that house prices rose at the fastest pace in four months.

The report is at odds with a separate survey from Hometrack Ltd, which suggests that higher credit costs are bringing the decade long housing boom to an end while UK mortgage approvals crashed to the lowest level in 26-years.

Nevertheless, the Bank of England will probably keep interest rates on hold in the near-term and the Pound may continue to make gains against the Dollar as we build up to this evening's crucial announcement.

Data Released 31st October

UK 10:30 Consumer Sentiment Survey (October)

EU 10:00 EC Business Climate (October)

EU 10:00 EC Economic Sentiment (October)

EU 10:00 HICP Flash (October)

EU 10:00 Unemployment (September)

U.S 12:15 ADP Employer Report (October)

U.S 12:30 Advance GDP (Q3)

U.S 13:45 Chicago PMI (October)

U.S 14:00 Construction Spending (September)

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon