Daily Insight

Following on from last week, the unrelenting decline of the Dollar continued on Friday as the U.S currency fell to yet another record low against the Euro and traded through the resistance at 2.0560 versus the Pound as we build up to the FOMC rate announcement on Wednesday.

In terms of economic data, the Dollar came under further pressure following the University of Michigan consumer confidence survey, which only served to exacerbate concerns of a consumer led recession in the States.

The index was surprisingly revised down to a reading of 80.9 in October, the lowest level since 2006. Elsewhere, the U.S Dollar also found little support as the price of oil continued to trade near the record highs above $90 a barrel amid escalating tensions between the U.S and Iran while Turkish warnings of a broader assault on Kurdish militants isn't helping to curb prices.

There is a host of significant economic reports released in the U.S this week including the ISM manufacturing survey and the nonfarm payrolls numbers on Friday.

Nevertheless, the focus will fall squarely on the FOMC meeting this Wednesday with policy makers expected to lower interest rates by a further 25 basis points. Fed fund futures have fluctuated aggressively over the past week with the market factoring in a 90% probability of a rate cut this month while the tone and content of the accompanying statement may incur further Dollar weakness.

The positive sentiment surrounding the Euro continued to gather momentum last week as the single currency breached the 1.4400 barrier against the U.S Dollar and approached the highest level in two years versus the Pound.

The Euro's gains came despite a weaker-than-expected report consumer confidence, which showed that sentiment had dropped to the lowest level in seven months.

Elsewhere, the Ifo business climate index showed that confidence in Germany fell to the lowest level in nearly two years over the same period as higher interest rates and rising consumer prices put a strain on spending.

The European Central Bank has so far retained a hawkish stance and has reassured the market that a strong Euro won't have a bearing on monetary policy but the governing councul will need to take note of the downside risks to growth that dwindling consumer spending and investor confidence present.

The Pound has been under considerable pressure against most of the major currencies over the past week or so but the UK currency continues to make rapid gains versus the Dollar despite a sparse supply of UK economic data.

The Bank of England issued a particularly gloomy outlook for financial markets on Thursday, noting that credit and equity markets remain "vulnerable to further adjustments".

The tone and language used in the statement seems to suggest that the BoE remains concerned that the slowdown in the U.S and rising credit defaults could trigger further turmoil in global financial markets.

The shift in sentiment does not necessarily mean that policy makers will consider lowering interest rates in the short-term but it does effectively diminish the prospect of any further monetary tightening.

In terms of economic data, the Pound may struggle to make gains amid the release of a report on the UK housing market, which may show that prices fell for the first time in two years this month.

Data Released 29th October

UK 09:30 Mortgage Applications (September)

written by Adam Solomon