Daily Insight

The Pound rocketed through the resistance level at 2.0440 against the Dollar yesterday and peaked just above 2.0500 following a surprisingly positive report on UK retail sales, which rose more than initial forecasts in September.

The fallout from the Northern Rock fiasco has severely dampened consumer confidence and stores have resorted to the biggest discounts in nearly three years in order to attract business.

Sales advanced 0.6% after a similar gain in August with high street prices falling 1.5% this year, the most since January 2005. In the aftermath of the report, the Pound rose 0.4% against the Dollar and from a technical perspective a break above 2.0496 could trigger a clear run towards 2.0650.

However, the Pound failed to make any real ground against the Euro and although service sector growth looks positive at present, the pace of economic expansion is likely to slow over the next year.

The preliminary estimate of UK gross domestic product will be the sole piece of economic data released this morning with growth expected to moderate from 3.1% to 2.3% this year. The UK economy probably expanded at the slowest pace in over year in the third quarter as higher borrowing costs begin to restrain growth.

The Euro rose to a fresh record high against the Dollar yesterday and the single currency also made strong gains versus the Pound despite concerns among the French that a strong Euro will have a damaging effect on the economy.

Nevertheless, the European trade balance showed that the surplus actually increased significantly in the month of August as exports to the U.S remained steady.

The European Central Bank has retained a hawkish bias towards further monetary tightening and the report yesterday would have done little to dampen sentiment and convince the governing council that the economy could withstand a strong currency.

While the Euro remains well under the trend support at 1.4420, the chances of further downside movement is likely over the coming weeks as we look to test the resistance around 1.4250.

The renewed weakness in the Dollar continued to gather momentum yesterday as the single currency sank to a historic low versus the Euro while also peaking at 2.0500 against the Pound.

At the beginning of the week, Fed fund futures were pricing in a 32% chance of an interest rate cut at the end of this month but the overwhelming rise in oil prices combined with dismal economic reports has seen a sharp shift in sentiment.

The latest developments have revived talk of a U.S recession but rising consumer spending and a strong labour market makes this slightly premature.

An index of leading economic indicators increased 0.3% in September as stocks climbed and jobless claims fell. The report reinforces expectations that the two-year housing slump will slow the economy without undoing the expansion that began in 2001.

However, a separate report yesterday showed that growth in manufacturing in the Philadelphia region moderated in October. In the aftermath of the report, the Dollar weakened further amid news that interest rate expectations have risen to a 70% chance of a cut this month as the sharp shift in sentiment saw traders adjust their positions.

Data Released 19th October

UK 09:30 Gross Domestic Product (Q3 Prelim)

written by Adam Solomon