Daily Insight

Following on from last week, the U.S Dollar succumbed to a fresh record low against the Euro, breaching the 1.4200 level by the close of trading on Friday and also recording heavy losses versus the Pound amid a mixed bag of economic reports.

U.S consumer spending rose more than initial forecasts in August amid speculation that the fallout from a weakening labour market and the collapse in subprime lending has yet to impact the broader economy.

In addition, there was evidence of some improvement in the manufacturing sector as the Chicago PMI took a surprising swing to the upside with growth rising above a reading of 53.0 with a figure above 50 indicating expansion.

However, personal income growth slowed as spending increased while the PCE deflator, the Fed's preferred measure of inflation, moderated to a degree that suggests further monetary easing is likely.

Collectively, the data last week reinforces the view that the Fed will need to cut interest rates at the end of this month but nothing more than a quarter-point cut is likely since the rise in commodity prices and the fall in the Dollar will inevitably put upside pressure on inflation.

The Dollar came under intense pressure against both the Pound and the Euro and will be looking for some support this week as the focus switches to the monthly U.S employment report on Friday. Payroll growth has weakened over the past few months but recent evidence in weekly jobless claims shows that a rebound in nonfarm payrolls is likely in September.

The overwhelming strength of the Euro continues to show few signs of subsiding as the single currency approaches another record high versus the Dollar and has also risen to the highest level against the Pound since April 2006.

The European Central Bank has so far been reluctant to acknowledge the impact of the Euro's phenomenal rise on the wider economy but reports last week have shown softer inflation and weakening confidence.

German retail sales fell 1.4% in August despite the fact that unemployment in the region hit the lowest level in 14-years as confidence in the economy on the whole has deteriorated.

As I have mentioned, the ECB has so far failed to comment on the impact of the Euro but the EU's Junker stated last week that a strong currency was causing concern and it seems to be only a matter of time before the ECB makes a similar comment.

The Central Bank's reluctance to slow the Euro's rally may stem from the flash estimate on consumer prices for September, which surprising showed that inflation had risen above the 2.0% target for the first time in over a year.

A strong Euro would normally reduce inflationary pressures but considering the unprecedented rise in commodity prices, the ECB may be forced to retain a tightening bias in the monthly interest rate announcement this week.

The Pound traded near to the lowest level in nearly two and a half years against the Euro last week amid reports from the Financial Times that the UK mortgage lender, Northern Rock, had been forced to borrow a further £5 billion to stay in business.

The UK currency recorded the fourth weekly decline against the Euro, pushing it to its worst quarter performance on over four years amid speculation that the Bank of England will need to cut UK interest rates from 5.75%.

However, the Pound has continued to upward momentum against the U.S Dollar and came within a whisker of 2.0500 despite reports of weakening consumer confidence and the fallout from the news that Northern Rock sought further emergency funding from the Bank of England.

The focus this week will inevitably fall on the Bank of England interest rate announcement on Thursday with althe MPC expected hold rates unchanged. However, the Pound may struggle to make gains in the build-up to the announcement amid speculation that surprise rate cut could be on the cards given the problems with the UK banking sector.

Data Released 1st October

UK 09:30 Consumer Credit (August)

UK 09:30 CIPS Manufacturing Survey (September)

UK 09:30 Mortgage Applications (August)

EU 09:00 Manufacturing PMI

U.S 15:00 ISM Manufacturing (September)

written by Adam Solomon