Daily Insight

The renewed appetite for the Dollar continued to gather pace yesterday as a delayed reaction to Friday's non-farm payrolls report sent the U.S currency higher against both the Euro and the Pound despite the fundamental lack of economic data due to the Columbus Day holiday.

The focus today will inevitably fall on the release of the FOMC minutes from the September 18th monetary policy meeting where the Reserve Bank lowered both Fed funds and the discount rate by 50 basis points each.

Global credit markets have stabilized since policy makers took the pre-emptive action of cutting interest rates by half a percentage point but the tone and language used in the report this evening could trigger further market movement.

One eventuality is that the Fed may have elected to deliver a larger interest rate cut in September in order to avoid successive cuts the following month and not to help the ailing U.S economy.

If that proves the case then the Dollar is likely to make further gains against the majors as the minutes combined with the monthly employment report will allow the Fed to hold rates steady before further monetary easing in December.

The Euro continued to struggle against the majors yesterday, dropping to a near two-week low versus the Dollar amid reports that European Finance Ministers had expressed concerns that the single currency was appreciating too quickly.

The Euro has strengthened 11.3% against the Dollar in the past year alone and Jean-Claude Juncker, the Prime Minister of Luxembourg, has expressed concerns that the Euro's rise is more than enough to reduce global trade imbalances.

The Euro also came under pressure versus the Pound as we look set to test the resistance around 1.4500 before officials hold a second day of meetings today.

Over the past month, ECB President, Jean-Claude Trichet has urged politicians to show "verbal discipline" when discussing the Euro and he is due to testify to the European Parliament in Brussels today.

In terms of economic data, the Euro also struggled to make gains as a report in Germany showed that factory orders only rebounded 1.2% in August following the biggest drop in at least 16-years.

Following the Bank of England's decision not to lower interest rates in October, the Pound has rallied against most of the major currencies but a mixed bag of economic data left the UK currency weaker against the U.S Dollar last night.

The producer price index, which provides a measure of inflation, showed that input prices had risen strongly in September although output prices were much weaker than initial forecasts.

This suggests that despite rising oil prices driving up the cost of raw materials, the higher costs have not yet been passed on to factories even though the annualized pace of industrial production has slowed materially over the past quarter.

As a result, the Pound came under moderate pressure against the Dollar as the Bank of England faces the unenviable task of balancing rising inflationary pressures against slowing economic growth.

Data Released 9th October

UK 09:30 Trade Balance (August)

GER 11:00 Industrial Production (August)

U.S 19:00 Minutes of September FOMC Meeting

written by Adam Solomon