Daily Insight

The resurgent Pound roared back against the majors yesterday, reversing almost all of Monday’s losses, although the 2.0500 level has provided some resistance for the pair as we closed last night just under this level.

The UK currency also rose significantly against the Euro and looks set to test the trend resistance at 1.4420 as the Pound benefits from increased demand for high-yielding currencies with traders looking to get a better return for their investment.

Sterling continued to rally through the course of the day despite a particularly negative report from the Confederation of British Industry who showed that confidence among UK manufacturers fell to the lowest level in almost two years.

The quarterly index of optimism fell to a reading of minus 13 in October from minus 2 in the three months through July as a strong Pound made British exports more expensive.

The report suggests that growth in the UK economy may have peaked after the Pound reached a 26-year high against the Dollar in July and a rise in credit costs let to a run on deposits at the UK's fifth biggest mortgage lender, Northern Rock plc.

Nevertheless, the Pound may continue to make gains against the Dollar amid speculation that the Bank of England has no intention of cutting UK interest rates in the short-term, particularly since growth in the third quarter far outweighed expectations at an annual rate of 3.3%.

The Euro resumed the upward momentum against the Dollar yesterday but fell 0.4% versus the Pound amid reports that Euro-zone industrial orders were released slightly muted at 5.1% in August.

A strong currency is just starting to weigh on investment demand in the region and although the industrial sector continues to perform well, the pace of output has just started to slump to a slower pace of growth.

There may be further evidence of this in the Flash estimate of the purchasing managers' index this morning with growth in manufacturing expected to slow modestly in October.

However, the Euro may receive a boost as a separate gauge of the report may show that service sector growth remained far more resilient this month as domestic demand is buoyed by a strong labour market.

Elsewhere, a member of the ECB's governing council is due to speak this morning and a hawkish commentary on monetary policy will help propel the Euro higher against majors.

The Dollar resumed the downward momentum against 15 out of the 16 most actively traded currencies yesterday as the release of the Richmond Fed manufacturing index saw the beleaguered currency fall almost two points against the Pound.

The gauge of factory output showed that overall business activity unexpectedly declined to the lowest level in five months in October led by weakness in new orders and domestic demand.

In terms of economic data, the Dollar may continue to decline today amid further evidence that the housing recession is showing few signs of abating.

Sales of existing homes in the U.S probably fell to the lowest level in six years last month with purchases declining 4.5% as the slump in the property market threatens to curtail the pace of economic growth. The collapse in subprime lending will limit consumer’s access to credit and will weigh on sales even more over the coming months.

Data Released 24th October

EU 09:00 Current Account (August)

EU 09:00 Flash PMI - Manufacturing (October)

Services

U.S 15:00 Existing Home Sales (September)

written by Adam Solomon