Daily Insight

The renewed appetite for the Pound looked to continue yesterday as the UK currency managed to consolidate above 2.0400 versus the U.S Dollar but had made modest losses against the Euro as we hovered around the trend support at 1.4420.

A recent spate of positive economic reports combined with a particularly hawkish statement from the governor of the BoE, Mervyn King, has seemingly shifted sentiment away from a UK interest rate cut.

In his latest statement, King acknowledged that "even though inflation is close to the target and pay pressures are muted", the Central Bank will continue to look ahead and monitor the risks to inflation that were identified in August.

In terms of economic data, a report from the British Retail Consortium showed that retail sales climbed by the most in three months in September. Revenues at outlets open at least a year rose 3.0% from the same period in 2006 after improving 1.8% in August amid signs that consumers are undeterred by higher credit costs.

However, despite the obvious strength in consumer sentiment, the Pound has come under significant pressure this morning following the release of a report from the Royal Institution of Chartered Surveyors.

UK house prices fell at the fastest pace in two years last month after higher interest rates and concerns over the outlook for the economy weighed heavily on homebuyers' confidence. Subsequently, the Pound has well fallen under the trend support at 1.4420 against the Euro and has also declined heavily against the U.S Dollar.

The positive sentiment surrounding the Euro continued to gather pace yesterday as the single currency rallied against both the Pound and the Dollar amid comments from the German Finance Minister on Tuesday, which helped quash concerns over the Euro's relentless rise.

Over the past year, the European Central Bank have increased borrowing costs steadily and as a monetary policy authority, the governing council seems to respect stability and at the same time despise volatility.

The market is never caught by surprise as the chairman of the ECB, Jean-claude Trichet, uses a specific tone and language to signal a European rate hike a month in advance.

Some quarters of the Euro-zone have been screaming for the Central Bank to intervene and lower interest rates amid concerns that the Euro's 11% rally against the Dollar will weigh heavily on exports.

Nevertheless, the Central Bank have seemingly ignored these pleas and has instead retained a hawkish bias with ECB member Garganas claiming yesterday that borrowing costs still remain at an "accommodative" level.

Therefore, despite the increased turmoil in credit markets and the overwhelming strength of the Euro, the ECB stand ready to act as necessary in the belief that inflation will remain above 2.0% for the remainder of the year.

The Dollar continued to slide against the Euro yesterday and also remained under pressure versus the Pound as the lack of direction surrounding the U.S currency continues to dominate the market.

There have been a host of positive economic reports that have seemingly shifted sentiment away from a probable rate cut this month but thus far the Dollar has failed to react in a positive manner.

Firstly, the U.S employment report showed that the economy added more jobs to payrolls than expected in September while the August contraction was surprisingly wiped out in the revised figures for that month.

The FOMC minutes also failed to result in any cohesive market activity despite the tone of the report suggesting that the Federal Reserve were in no hurry to lower interest rates again after a 50 basis point cut in September.

As a result, interest rate futures drove the possibility of a rate cut down while equity traders saw the Dow drop 80 points yesterday.

Therefore, it seems only a matter of time before the Dollar follows suit and begins to make gains against the Pound and the Euro with the market waiting for the release of the September retail sales report on Friday.

Data Released 11th October

UK 11:00 BCC Manufacturing Survey (Q3)

EU 09:00 ECB Monthly Bulletin Published

EU 10:00 GDP (Q2 Revised)

U.S 13:30 Export / Import Prices (September)

U.S 13:30 Jobless Claims (w/e 13th October)

U.S 13:30 Trade Balance (August)

written by Adam Solomon