Daily Insight

The Pound continued to make gains against the Dollar yesterday and remained largely unchanged versus the Euro amid reports from the online property site, Rightmove plc, which showed an unexpected rebound in house prices this month. The renewed appetite for the UK currency was severely tested last week as a separate gauge of property prices fell at the fastest pace in two years after higher interest rates and concerns over the outlook of the economy weighed heavily on confidence. The focus today will inevitably fall on the latest round of consumer prices where UK inflation probably stayed below the Bank of England's 2.0% target for a third consecutive month in September. Prices may have risen 1.9% from this stage last year, compared with a 1.8% increase in August and that may convince the Bank of England to keep UK interest rates unchanged at 5.75% for the remainder of the year. In a speech last week, the governor of the BoE, Mervyn King, said that the Bank won't lower its guard on inflation despite the furore surrounding the Northern Rock fiasco and overall turmoil surrounding credit markets.

The Euro has made significant gains against the Pound and while we remain under the trend support at 1.4420, the single currency looks to set to test the support around 1.4250 despite a surprisingly dovish report from the European Central Bank. The ECB monthly bulletin indicated that policy makers will need more information on the economic impact of the credit market turmoil before a decision is taken whether to raise interest rates again. Although the Euro is hovering just under the all time high against the U.S Dollar, the single currency is struggling to extend its gains despite the ECB's stance on future monetary policy. Despite the overwhelming rise in the Euro over the past year, the Central Bank seems to remain unconcerned with the effects of a strong currency on the broader economy. Therefore, the focus this morning will fall heavily on the final estimate of consumer prices in September with inflation rising above the 2.0% for the first time in over year. The latest rise in oil prices will only exacerbate the prominent concerns over inflation, which will keep the ECB on alert and heighten the chances of further monetary tightening.

The negative sentiment surrounding the U.S Dollar continues to dominate the market with the U.S currency likely to make further losses against the Pound despite a host of positive economic reports that have shifted sentiment away from a probable rate cut this month. U.S inflationary concerns continue to alert Fed officials while the renewed stability in global credit markets means it will be very difficult for the Federal Reserve to lower interest rates again this month after a 50 basis point cut in September. The current expectations for a rate cut in October remain at roughly 32%, which is unchanged form last week as the Empire State manufacturing survey was much stronger than expected this month. However, the Dollar came under further pressure following a speech from the Fed chairman, Ben Bernanke, who said that the contraction in the U.S housing market will prove a "significant drag" on economic growth into the New Year.

Data Released 16th October

UK 09:30 Consumer Price Index (September)

EU 10:00 Harmonised Consumer Price Index (September Final)

GER 10:00 ZEW Index (October)

U.S 14:00 TICs Net Capital Inflows (August)

U.S 14:15 Industrial Production (September)

U.S 18:00 NAHB Housing Market Index (October)

written by Adam Solomon