Daily Insight

Following on from last week, the U.S dollar posted the biggest weekly gain against the Euro in over a month amid signs that the economy is weathering the housing recession.

The monthly U.S employment report showed that payrolls increased by 110,000 in September and revised figures for August showed an unexpected gain, which wiped out what had been the first decline in four years.

Robust growth in the labour market combined with rising personal income may prevent the Federal Reserve from easing interest rates further this month after a 50 basis point cut in September.

The U.S currency may continue to show signs of recovery this week as Friday's
surprising upward revision to August payrolls has scaled back the prospect of a further rate cut this month.

In terms of economic data, the focus this week will fall on the tone and language used in the minutes from the Fed's last policy meeting. The Fed must balance upside risks to inflation against the housing market slowdown and the overall impact on the broader economy.

The recent positive momentum surrounding the Euro was severely tested last week as a shift in tone from ECB President, Jean-Claude Trichet all but ended the possibility of further monetary tightening this year.

The ECB's governing council elected to hold interest rates at 4.00% this month but dropped the term "accommodative" from the accompanying statement. This seems to suggest that the Central Bank can't afford a further rate hike in the immediate future amid times of increased uncertainty in global credit markets and the ongoing slowdown in the U.S.

The Euro's unprecedented rise against both the Dollar and the Pound will undoubtedly affect European exports and therefore will threaten to curtail the pace of economic expansion.

Further evidence of this can be expected to in the regional manufacturing surveys this week, which are expected to show that factory orders throughout Europe declined in September.

Following the statement from Trichet last week, the single currency closed above the trend support at 1.4420 versus the Pound and also relinquished the record highs achieved against the Dollar.

The Pound had been under considerable pressure against the Euro, dropping to the lowest level in well over two years amid speculation that the Bank of England would cut UK interest rates this month.

However, the monetary policy committee elected to hold borrowing costs steady at 5.75% last Thursday despite a spate of negative economic reports and the fallout from the Northern Rock fiasco.

As a result, the Pound managed to make further gains against the Euro and has also retained a hawkish bias versus the Dollar amid suggestions that the MPC will leave rates on hold for the remainder of the year.

There is a plethora of significant economic reports released in the UK this week with the focus falling on producer prices, industrial production and retail sales, all of which should provide some clarity on the general direction of the economy.

Data Released 8th October

UK 09:30 Industrial Production (August)

- Manufacturing Output

UK 09:30 Producer Price Index (September)

GER 11:00 Industrial Orders (August)

written by Adam Solomon