Daily Insight

Following on from last week, the Pound continued the upward momentum against the Dollar on Friday to retest the major resistance around 2.0496 before consolidating just under that level by the close of trading.

The UK currency also advanced 0.3% against the Euro amid reports that the economy grew at a faster pace than expected in the third quarter, driven by expansion in service industries.

UK gross domestic product increased 0.8% in the three months through August, the same as in the second quarter, while the annual growth rate was 3.3%, the most since 2004.

Service industries, which account for three-quarters of the economy, expanded at the quickest pace since 2003 but higher borrowing costs are likely to slow growth
considerably next year.

The focus this week will fall on the UK housing market after reports last week that Britain may be facing a sharp fall in property prices similar to that endured in the U.S.

The International Monetary Fund said that there is considerable evidence to suggest that the UK and a number of other European nations are vulnerable to a price correction. However, the issue of supply and demand is likely to keep UK house prices elevated with the Nationwide index expected to report a modest gain in prices for October.

The Euro rose to yet another record high against the ailing U.S Dollar last week and remained well under the trend support at 1.4420 versus the Pound as higher inflationary pressures undermined concerns over the impact of a strong Euro on the broader economy.

A number of members of the Central Bank's governing council have even said that they welcome a strong currency and highlighted the current risks to price stability to increase speculation of further monetary tightening to come.

In terms of economic data, the focus this week fall on the German consumer price index, which will be important given that the ECB continues to emphasise the upside risks to inflation.

Euro-zone money supply will also be closely watched on Friday with the 3 month moving average expected to rise from 11.4% to 11.6% in September.

The Dollar continued to decline against the majors last week, dropping to an historic low versus the Euro and also testing the resistance just under 2.0500 against the Pound.

The overwhelming rise in the price of oil combined with a spate of negative economic reports saw Fed fund futures raise the probability of an interest rate cut from 32% at the beginning of the week to 70% by the close of trading on Friday.

The G7 meeting at the weekend may prove critical if the statement mentions the recent volatility in FX markets while concerns over the state of the U.S economy is also likely to be the dominant theme.

Oil prices have risen to a record high over the past week and if that continues over the course of this week then the Federal Reserve may resort to a rate cut on October 31st.

In terms of economic data, the Dollar may continue to decline this week as the focus switches to ailing U.S property market. The housing recession shows few signs of abating with existing home sales forecast to drop to annual rate of 5.25 million in September.

Data Released 22nd October

UK 08:00 Nationwide House Prices (October)

written by Adam Solomon