Daily Insight

The Pound's dramatic appreciation against the Dollar continued yesterday as the UK currency consolidated above 2.0560 and also outperformed the Euro despite a host of negative economic data that supports the Bank of England's gloomy outlook for the economy.

Firstly, a report from Hometrack Ltd showed that UK house prices fell for the first time in two years this month as the average cost of a home dropped 0.1% from September.

Elsewhere, a separate report from the BoE showed that UK banks approved the fewest number of mortgages in 26-months over the same period, adding to evidence that the decade long housing boom is coming to an end.

UK lenders only granted 102,000 new loans in September, down from 108,000 the previous month and the fewest number since July 2005.

The monetary policy committee have raised UK interest rates to the highest level in six years and the collapse in global credit markets is making it increasing difficult for consumers to shoulder record debts.

Nevertheless, the Pound stood little changed in the aftermath of the report as a drop in mortgage approvals is more likely to be a reflection of higher credit costs rather than the result of a weakening housing market.

The Dollar slumped to a near 20-year low versus the Pound yesterday and also made further losses versus the Euro as the lack of economic data switches attention to the FOMC rate announcement on Wednesday.

The decision from the Federal Reserve has the potential to shift market expectations and set the tone for the Dollar's performance over the coming weeks.

Fed fund futures calculate an 86% probability that policy makers will lower U.S interest rates by a further 25 basis points this month with the reaction of the Dollar remaining largely dependent on the tone of the accompanying statement

The Euro soared to a fresh record high against the Dollar yesterday following a stronger-than-expected report on regional consumer price inflation in Germany.

The Euro's dramatic appreciation against the Dollar is beginning to impact the economy as the German Ifo sentiment index slipped to a two-year low this month.
The ECB has so far been reluctant to acknowledge the probable effects to economic growth and that staunch stance may see the Euro breach 1.4500 against the Dollar.

However, the Euro has snapped a five day winning streak against the Dollar this morning and also declined versus the Pound amid speculation that UBS, one of Europe's largest banks, reported its first quarterly loss in almost five years.

The report will only serve to heighten concerns that lenders will announce a drop in earnings in the third quarter that can be linked to the collapse of the U.S subprime mortgage market.

As a result, the Euro has slipped against 13 out of the 16 most actively traded currencies this morning and may struggle to make gains ahead of reports that consumer spending weakened last month.

Data Released 30th October

U.S 14:00 Consumer Confidence (October)

written by Adam Solomon