Daily Insight

The Pound came within a whisker of touching 2.0500 versus the Dollar yesterday before trading off at the close of trading last night while the UK currency also made modest gans against the Euro despite a host of weak economic data.

Consumer credit and a separate report on UK mortgage approvals were both down on expectations while growth in the manufacturing sector slowed in September. Like the Euro-zone, companies in the UK are struggling with the recent strength of the Pound, which will inevitably cool demand from overseas and weigh on export growth.

The relative positive sentiment surrounding the Pound can also be attributed to a sense of stability returning to financial markets as investor's appetite for risk improves, giving them confidence to buy higher-yielding currencies funded by loans in Japan.

The Bank of England's 5.75% interest rate is the highest amongst all of the Group of Seven nations, making the Pound an attractive commodity for investors looking for higher returns.

However, the recent spate of negative economic reports may fuel speculation that the MPC could spring a surprise on Thursday and cut UK interest rates to provide some relief to the banking system.

A report yesterday from Hometrack Ltd showed that UK house prices were unchanged for a second consecutive month in September, which suggests that five interest rate hikes in the past year and have finally slowed the market.

The Euro vigourously tested the 1.4250 level against the Pound last week but the single currency has traded well above that level over the past trading session as weakening economic data will surely force the ECB to change it's monetary policy stance this Thursday.

The chairman of the Central Bank, Jean-Claude Trichet, has so far failed to acknowledge the impact of a strong Euro on the broader economy and in a speech at the weekend he elected to focus on the 'good work' of the Bank in containing the credit crisis.

However, given the host of negative economic reports, Trichet will surely have little choice but to recognise the damage that the Euro is having on corporate profitability as a host of companies are set to report huge losses based on currency fluctuations.

In terms of economic data, growth in Euro-zone manufacturing remained virtually unchanged yesterday although the regional surveys showed that activity had slowed in both France and Germany.

The Euro may struggle to make further gains against the Pound this morning ahead of a report on European unemployment, which is forecast to stay unchanged at 6.9% in August while producer price inflation may moderate to 1.7% year-on-year over the same period.

The Dollar rose against both the Euro and the Pound yesterday, which coincided with a significant rally in the U.S stock market that suggests the turmoil surrounding financial markets is beginning to subside.

The Dow soared to a new all time high above 14,000 taking carry trades and other high yielding currencies up with it but the rally yesterday only masks the problems that the U.S economy still faces.

The marked improvements in the regional manufacturing surveys in Chicago and Philadelphia were not reflected in the ISM report yesterday, which surprising showed that growth in the sector rose at the slowest pace in six months.

The factory index fell to a reading of 52.0 in September, suggesting that the economy is cooling despite stronger growth from overseas and weak Dollar spurring exports.

The drop in the prices paid component of the report indicates that inflationary pressures are moderating, which will give the Federal Reserve the scope to lower interest rates further at the end of this month.

The Dollar may struggle against the majors this afternoon as the sole piece of economic data may show that pending homes fell in August for the fifth time in six months.

Data Released 2nd October

EU 10:00 Producer Price Inflation (August)

EU 10:00 Unemployment (August)

U.S 15:00 Pending Home Sales (August)

written by Adam Solomon