Daily Insight

By the close of trading last night, the Dollar stood virtually unchanged against the Pound as we continue to test the resistance around 2.0500 while the U.S currency also remains subdued versus the Euro amid a dismal report on the housing market.

Sales of existing homes in the U.S fell a further 8% in September and to an annual rate of 5.04 million, the fewest number since records began in 1999.

The report from the National Association of Realtors showed that the decline was nearly twice as steep as initial forecasts with the median price of a home dropping to the lowest level in a year.

In the aftermath of the report, Fed fund futures suggested a 100% probability that the Federal Reserve will lower interest rates next Wednesday. The Dollar came under further pressure amid some speculation that policy makers will cut rates by as much as 50 basis points, rather than the projected quarter point reduction.

The report yesterday provides a clear indication of just how dire the U.S property market has become and causes concerns over the negative impact on the broader economy.

Further evidence of the dramatic slump in housing may be realised this afternoon as a second report on the sales of new homes is expected to show that purchases fell 3.1% in September.

Nevertheless, the Dollar may prove more reactive to a separate report on durable goods orders with the headline figure expected to improve 1.5% last month.

The Euro came under further pressure against a resurgent Pound yesterday, trading up towards 1.4400 before the close of trading last night despite a particularly positive report on European service industries.

As commercial banks started to recover from the surge in credit costs sparked by defaults on U.S subprime mortgages, growth in services began to accelerate in October with the index rising to a reading 55.6 from 54.2 the prior month.

However, the purchasing managers' index on European manufacturing showed that growth in the sector actually slowed for a fourth consecutive month with the index falling to a reading of 51.5 from 53.2 in September.

Although a figure above 50 indicates expansion, the consistent decline in output suggests that slower global growth and the Euro's dramatic appreciation against the Dollar is threatening to curb Euro-zone exports.

The single currency has risen to a record high of 1.4349 against the Dollar this week but policy makers within the ECB's governing council seem undeterred and have expressed confidence in the outlook for economic growth.

written by Adam Solomon