Daily Insight

The Pound was driven lower against both the Euro and the Dollar yesterday, falling 0.3% by the close of trading last night after UK inflation unexpectedly held at the lowest level since March 2006.

Consumer prices rose just 1.8% from this stage last year, the same as August and below the Central Bank's 2.0% target for a third consecutive month, giving the Bank of England the scope to begin cutting interest rates.

Initial forecasts suggested that the rate of inflation would rise to 1.9% in September after a number of hawkish statements from the governor of the Bank of England, Mervyn King.

In a recent speech to the Treasury select committee, King emphasised that policy makers are balancing the impact of higher credit costs on the economy against the risk of persistent inflationary pressures.

However, the report yesterday shows that higher interest rates and the turmoil in financial markets is evoking a crisis in confidence amongst the UK consumer and we can expect the Central Bank to cut the benchmark lending rate from the current 5.75% in the months ahead.

In addition, the Pound has also come under further pressure against the majors this morning as we build up to the release of the minutes from the Bank of England last policy-setting meeting.

The UK currency has fallen 3% since August amid speculation of a rate cut, although the report this morning is expected to show that policy makers voted unanimously to hold borrowing costs unchanged this month.

The Euro has struggled to reach the record highs achieved against the Dollar in recent trading sessions but the single currency managed to make modest gains versus the Pound amid a mixed bag of economic reports.

German consumer price inflation slowed unexpectedly in September while the much anticipated ZEW survey showed that analyst sentiment remained unchanged. Given the unprecedented rise of the Euro over the past few months, the report was expected to show that German investor confidence would continue to decline as demand from overseas wilts.

The index of investor and analyst expectations remained at minus 18.1, the same as in September, as the German stock market continues to rebound, rising 10% in the past two months alone.

The Euro received further support later in the session as ECB council member, Klaus Liebscher, said that the Bank remains focused on "significant" and rising inflationary concerns as 'risks to price stability are clearly pointing to the upside'.

The U.S Dollar was stronger across the board yesterday, rising significantly against both the Pound and the Euro as stock market losses supplement a band of weaker economic reports.

The rally in the U.S currency has little to do with the diminishing probability of a rate cut at the end of this month but more a reflection of the rising appetite for risk aversion as traders bail out of riskier higher yielding currencies in favour of the Dollar.

Elsewhere, the price of oil continues to rocket higher as tensions in the Middle East escalate while the credit crunch in August has unsurprisingly sent trader rushing back to U.S equities.

In terms of economic data, U.S industrial production was in line with initial forecasts although the prior number was revised lower while the housing market continues to struggle as builder confidence fall to another record low in October.

The focus today will fall on the September consumer price index where U.S inflation may have risen 0.2% in September while builders broke ground on the fewest number of new homes in 12-years.

Data Released 17th October

UK 09:30 Minutes BoE MPC Meeting (September)

UK 09:30 Claimant Count Unemployment (September)

UK 09:30 Average Earnings (3 months to August)

U.S 13:30 Consumer Price Index (September)

U.S 13:30 Housing Starts (September)

U.S 13:30 Real Earnings (September)

written by Adam Solomon