Daily Insight

The Pound rallied back above 1.4400 against the Euro yesterday and also made gains versus the Dollar as the Bank of England kept its benchmark interest rate unchanged at a six-year high in the lunchtime announcement.

A recent spate of negative economic reports combined with the furore surrounding the Northern Rock fiasco led to some speculation that the MPC would lower rates this month.

However, policy makers felt it necessary to assess the effects of higher credit costs on the economy before a likely rate cut at some point this year. The decision follows increased panic among depositors at Northern Rock after lending rates soared, leaving the lender unable to fund its own business and seek emergency liquidity from the Bank of England.

The run on Northern Rock, the first on a lender in over a century, has clouded the outlook for the UK economy and is bound to have a negative impact on consumer confidence in the months ahead.

Nevertheless, the outcome of the announcement sparked a positive reaction for Sterling as the UK currency rose against both the Euro and the Dollar with the minutes of the two-day meeting scheduled for release later this month.

The Euro came under pressure against the Dollar yesterday and also closed around the support at 1.4420 versus the Pound following the ECB interest rate announcement and accompanying press conference.

As previously anticipated, the Central Bank elected to leave interest rates unchanged in October and finally acknowledged that the rising Euro is threatening to curtail the pace of economic expansion.

A recent survey has indicated that the ECB, who shelved a planned rate increase last month, will wait until April to raise the benchmark lending rate to 4.25%.

The Euro has climbed to a record high against the Dollar this month and has subsequently clouded the outlook for the European export industry. However, policy makers have the unenviable task of managing slowing economic growth against persistent inflationary pressures as consumer prices rose back above the 2.0% ceiling for the first time in over a year.

In the press conference that followed yesterday's announcement, the ECB President, Jean-Claude Trichet, signalled that the Bank is prepared to adopt a wait and see policy with regards any further monetary tightening.

In his statement, Trichet stressed that "particular caution needs to be exercised when assessing the potential impact on the economy" with speculation mounting that the ECB will leave rates unchanged for the remainder of the year.

By the close of trading last night, the Dollar stood virtually unchanged against the Euro and had made modest losses versus the Pound following an industry report from the Commerce Department on durable goods orders.

Bookings placed with U.S factories actually fell by the most in seven months in August as concerns heighten that the turmoil in credit markets will begin to erode business confidence.

Orders declined a greater than forecast 3.3% following a revised 3.4% gain the previous month, which suggests that business investment will slow in the second half of the year as a worsening housing recession continues to weigh on consumer sentiment.

Nevertheless, the Dollar may receive a much-needed boost this afternoon amid the release of the monthly U.S job report. Recent surveys have conveyed a rebound in the labour market last month and the economy is expected to have added 100,000 jobs to payrolls in September.

Data Released 5th October

U.S 13:30 Non Farm Payrolls (September)

- Average Earnings
- Unemployment

written by Adam Solomon