Daily Insight

The Dollar came under renewed pressure against the Pound yesterday following a report from the National Association of Realtors, which showed that pending home sales fell an incredible 6.5% in August.

The index, based on contracts signed in August, is just the latest example of the overwhelming decline in the U.S property market as lenders become increasingly cautious following the subprime mortgage crisis.

The sharp fall in home sales was way above the 2.1% forecast as the index fell to a reading of 85.5, the lowest level since records began in January 2001. Borrowers are finding it increasingly difficult to secure credit as the housing recession begins to intensify following reports last week that existing home sales dipped to the lowest level in five years.

As a result, the Dollar fell against the Pound and may continue to struggle this afternoon amid the release of the ISM non-manufacturing report, which is expected to show that growth in U.S service industries moderated throughout September.

In addition, the ADP employment report is also due for release and may provide an insight into the monthly U.S job report on Friday, which is expected to show that the economy added more jobs to payrolls last month.

The Pound has been under increased pressure recently but surprisingly made modest gains against both the Euro and the Dollar yesterday as a sense of stability returns to financial markets and investors begin to seek high-yielding currencies for a greater return on their capital.

However, a spate of weak economic data combined with the slim possibility of an interest rate cut this Thursday is likely to weigh on Sterling sentiment and further losses can be anticipated in the build-up to the lunchtime announcement.

Nevertheless, the Pound received an unexpected boost this morning as a report from the Nationwide Building Society showed that UK consumer confidence had increased to a four-month high in September.

The index of sentiment rose to a reading of 99.0, the highest since May, as the lowest rate of unemployment in two years helped consumers look beyond the turmoil surrounding Northern Rock plc. The pick-up in confidence can be largely accredited to a strong labour market but higher interest rates and a surge in credit costs may slow economic growth and hiring later this year.

The recent positive sentiment surrounding the Euro ended in spectacular fashion yesterday as the single currency fell by the largest amount in over a month amid speculation that the ECB will be forced to verbally intervene this Thursday.

There is growing concerns in the Euro-zone that the overwhelming rise of the Euro against it's U.S counterpart will begin to weigh heavily on the economy over the coming months.

An article in the Financial Times yesterday highlighted the recent discontent amongst European politicians and exporters over the impact of a strong Euro on demand from overseas.

Officials within the European Central Bank have been notoriously reserved when commenting on the impact from a strong currency on the broader economy, which suggests that the President, Jean-Claude Trichet, will address the Euro's movements in the accompanying press conference this Thursday. The task for the Central Bank will be to ascertain whether the risks to economic expansion is greater that current inflationary pressures.

Data Released 3rd October

UK 09:30 CIPS Services (September)

EU 09:00 Services PMI (September)

EU 10:00 Retail Sales (August)

U.S 13:15 ADP Employment (September)

U.S 15:00 ISM Non-Manufacturing (September)

written by Adam Solomon