Daily Insight

The Pound stood firm against the majors yesterday and even made some gains versus the U.S Dollar despite the release of the minutes from the Bank of England's last policy meeting where the MPC considered a cut in UK interest rates this month.

The nine-strong committee actually voted 8-1 in favour of a no change with only David Blanchflower in favour of a reduction to calm rising credit costs. Some economists have lowered forecasts for UK interest rates following the collapse of the U.S subprime mortgage market, which pushed up borrowing costs while the annual rate of inflation slowed below the Bank's 2.0% target.

Consumer prices held at the lowest level since March 2006 last month and slowing economic growth will inevitably prompt further speculation of a rate cut.

Nevertheless, the Pound found some support when a separate report showed that UK unemployment fell to the lowest level in well over two years in September. The number of people out of work and claiming benefits dropped 12,800 from the previous month while average hourly earnings accelerated 3.7% over the last quarter.

Amid the fallout from the Northern Rock fiasco, a strong labour market will continue to support UK economic growth and provide a boost to consumer confidence.

The Pound may make further gains this morning as UK retail sales increased to 5.5% year-on-year in September from 4.9% at this stage in 2006.

The Euro continues to trade under the trend support at 1.4420 against the Pound and therefore further downside moves are likely over the coming weeks as the European Central Bank's stringent stance on monetary policy continues to drive the single currency.

A number of ECB officials have publicly supported a strong Euro and seem unconcerned with the effects on the economy and more specifically export growth while inflationary pressures in the Euro-zone continues to prompt further speculation of a rate increase.

There is a fundamental lack of economic data released in the Euro-zone this morning with the trade balance the sole number released and if the strength of the Euro was to have any impact on the economy, the most obvious would be trade.

The moves in U.S equities has triggered widespread volatility across the financial markets and the increased appetite for risk aversion has seen the Dollar strengthen against most high-yielding currencies.

The Dollar remained largely unchanged against the Euro but continued to decline against the Pound amid reports that the U.S housing recession deepened in September.

Builders started work on the fewest number of new homes in 14-years, which echoes the Fed's concerns that real estate is the major threat to U.S economic expansion. Housing starts declined 10.2% to an annual pace of 1.191 million last month and the figures will only strengthen the case for Fed policy makers to lower interest rates again in order for the economy to expand at a moderate pace.

The Open Market committee have been quick to stress that persistent inflationary pressures have prevented any further monetary easing with the price of oil rapidly approaching $90 a barrel.

However, a separate report from the Commerce Department showed that U.S consumer prices only rise 0.2% last month following a modest increase in August.

The Dollar is already struggling against 14 of the 16 most actively traded currencies this morning on speculation that the Philly Fed index will show that manufacturing in the Philadelphia region slowed this month, adding to the case for a further reduction in U.S interest rates.

Data Released 17th October

UK 09:30 Retail Sales (September)

EU 10:00 Trade Balance (August)

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

U.S 15:00 Leading Indicators (September)

U.S 17:00 Philly Fed Index (October)

written by Adam Solomon