Daily Insight

The Pound made strong gains against the Dollar yesterday and also managed to stem the losses incurred versus the Euro following a report from the Nationwide Building Society, which showed that UK house prices rose at the fastest pace in three months.

The average cost of a home increased 0.7% in September, compared with a 0.6% rise in August, amid signs that higher credit costs have yet to affect homebuyers. The problems surrounding Northern Rock combined with a global credit market slump and five interest rate increases in the past year have seemingly failed to dampen sentiment as growth in the property market continues to accelerate.

Other reports have sggested that the housing market is beginning to slow as prices rose just 9.0% from this stage last year and to the slowest pace in 11 months.

Elsewhere, the September survey from Citigroup confirmed that public inflation expectations for the next year were at the highest level since January, reaching a reading of 2.6% year-on-year from 2.4% in August.

However, the reports yesterday will have little impact on the Bank of England's monetary outlook but the positive sentiment surrounding the housing market combined with persistant inflationary pressures may prevent the MPC from cutting interest rates in the near-term.

The Euro rose to yet another record high against the Dollar yesterday and as we tentatively approach the 1.4200 level, the recent upside moves in the market has prompted the ECB President Trichet to finally buckle down and talk about the Euro's momentus rise.

A number of ECB policy makers have expressed concerns over the impact of a strong Euro on export growth but Trichet failed to deliver much when he tempered his comments about excess volatility with the reminder that the prospects for Euro-zone growth remain intact.

Basically, the ECB are concerned with the Euro's aggressive rise against the Dollar but at the same time doesn't believe that it will be a major problem as growth in the German labour market remain positive.

The report yesterday showed that the jobless rate had dropped to 8.8% in September from 8.9% the previous month with the amount of people out of wrok falling by 50,000.

However, a seperate report this morning has showed that German retail sales unexpectedly fell in August as higher oil prices and a global increase in the cost of credit threatens the pace of economic growth.

The overwhelming decline of the Dollar continued yesterday as the U.S currency fell to a fresh record low against the Euro and also recorded moderate losses versus the Pound following an abysmal report on the U.S housing market.

New home sales dropped more than initial forecasts in August as prices plummeted by the most in almost 40-years with purchases declining 8.3% on the month. Concerns over subprime mortgage defaults have clouded the outlook for the property market amid higher borrowing cost and heightened credit restrictions.

Not only did sales fall to the lowest level in seven years but the median price of a home also dropped to by the largest amount since 1970. The report yesterday follows an earlier report on existing home sales and collectively they provide strong evidence that the U.S economy will struggle to cope with the housing recession.

The Dollar may find some much needed support this afternoon as the focus switches to the personal income and expenditure report, which is expected to show persistant inflationary concerns while the Chicago PMI may point to growth in the manufacturing sector.

Data Released 28th September

UK 10:30 Consumer Confidence (September)

EU 10:00 EC Economic Sentiment (September)

- Constuction / Industrial Sentiment

EU 10:00 Flash HICP (September)

U.S 13:30 Personal Income / Expenditure (August)

U.S 14:45 Chicago PMI (September)

U.S 15:00 Construction Spending (August)

U.S 15:00 Michigan Sentiment (September Final)

written by Adam Solomon

The Pound continued to decline against the majors yesterday, briefly falling through the major support level of 1.4250 versus the Euro to record the lowest level of exchange since April 2006 despite a slightly stronger-than-expected report on the UK economy.

The final estimate of gross domestic product showed that economic growth had accelerated 3.1% in the second quarter with the upward revision coming from the expansion in services and a pick-up in manufacturing.

Therefore, the UK economy is heading for the fastest pace of expansion in three years but may begin to slow in 2008 following the collapse of the U.S subprime mortgage market, which has caused turmoil in financial markets around the world.

Despite the seemingly positive report on the UK economy, the Pound declined against both the Euro and the Dollar amid reports that commercial Banks in the UK sat out the Bank of England's three-month money auction and neglected to borrow emergency funds at a penalty rate.

The government was forced to release a significant amount of liquidity earlier this month in response to uncertainty surrounding the UK's fifth biggest mortgage lender, Northern Rock plc. However, the report yesterday shows that bank's may be finding it easier to borrow money after market interest rates fell to the lowest level since the start of the credit market slump.

The Euro rose to yet another record high against the ailing U.S Dollar yesterday despite reports that business confidence has suffered greatly as a result of the recent turmoil in financial markets, the U.S economic slowdown, and the prospect of a further tightening of Euro-zone interest rates.

Newspapers across Europe have highlighted the risks that a strong currency will have on the economy as a whole, particularly demand from overseas, with Europe being a largely export dependent nation.

Reports this morning showed that consumers are also becoming overly pessimistic as European retail sales slowed dramatically in September, led by the sharpest drop in Italy for two years.

An gauge of retail growth slipped to a seasonally adjusted 50.5 this month from 51.0 in August as European consumers are becoming more reluctant to increase spending after the rising cost of credit clouded the outlook for economic expansion.

The Euro may continue to test the major support levels against the Pound and look to make new record highs versus the Dollar amid the release of the preliminary estimate of German consumer prices, unemployment and Euro-zone money supply.

The relentless decline of the U.S Dollar has continued over the past trading session as the U.S currency fell to a record 1.4160 against the Euro and has also traded back above 2.0200 versus the Pound ahead of the latest round of housing numbers this afternoon.

In terms of economic data, the Dollar came under renewed pressure yesterday as a report from the Commerce Department showed that U.S durable goods orders had fallen by the most in seven months in August.

Orders had declined by more that the 4.9% anticipated after a revised 6.1% gain the previous month as industrial demand looks set to cool even as exports climb and inventories remain reduced.

Elsewhere, the Dollar stayed on the back-foot as speculation continues to mount that the Federal Reserve will be cutting interest rates again this year with Fed fund futures currently pricing in a 70% chance of a rate cut in October.

The report this afternoon on new home sales will go a long way to confirming or denying that assumption with sales expected to fall to the lowest level in seven years in August. Purchases of new property may fall to an annual rate of 825,000 last month as the report follows an earlier index of existing home sales, which dropped to a five-year low over the same period.

Data Released 27th September

UK 11:00 CBI Distributive Trades (September)

GER 09:00 Unemployment (September)

EU 09:00 M3 / 3 Month Moving Average (August)

U.S 13:30 GDP / Deflator (Q2)

U.S 15:00 New Home Sales (August)

written by Adam Solomon

Following on from last week, the Pound dropped to the lowest level in well over a year versus the Euro but managed to claw back above the $2.00 barrier against the Dollar as an unexpected rise in retail sales offset criticism of the BoE governor, Mervyn King. With the pace of consumer spending showing few signs of slowing, the UK economy may continue to expand at a moderate pace despite heightened concerns over sentiment following the Northern Rock fiasco. In a speech to the UK treasury select committee, King was forced to vigorously defend his handling of the Northern Rock bailout as the Central Bank finally released over £10 billion in emergency funds to prevent a liquidity crisis. The Pound may continue to decline against the Euro over the coming week despite signs that the downward momentum may have subsided for the time being. Following the problems at Northern Rock, concerns about the banking sector are growing and that may undermine Sterling sentiment in the short-term amid speculation that the Bank of England will need to cut UK interest rates.

The Dollar has fallen to the lowest level on record against the Euro and bounced back above 2.0200 versus the Pound following the Federal Reserve's decision to cut interest rates by 50 basis points last week. The U.S currency has continued to decline against 15 out of 16 of the most actively traded currencies as rumours circulate that the Fed will lower interest rates again before the turn of the year with a 70% chance of rate cut next month. The latest round of economic reports have shown an unexpected rise in jobless claims, sagging retail sales and a morbid outlook for the U.S housing market. Therefore the focus this week will fall on the U.S home sales data, which is expected to show that the depth of the subprime mortgage crisis is intensifying the housing recession while a number of key Fed policy makers are due to speak this week.

The positive sentiment surrounding the Euro has continued to gather momentum over the past week as the single currency rallied above 1.4100 against the Dollar and to the highest level ever recorded. The Euro also made significant gains versus the Pound, dropping briefly under 1.4300 to test the highs from April 2006 amid speculation that the ECB could raise interest rates by a further 25 basis points this year. Despite the increased level of volatility surrounding financial markets of late, the ECB's governing council have retained a tightening bias as the chairman of the Central Bank stated that "upside risks" to inflation remain a concern to policy makers. At the present time only a verbal intervention from the chairman of the ECB, Jean-Claude Trichet or a spate of negative economic reports could seemingly slow the Euro's unprecedented rise against both the Pound and the Dollar. In terms of data, we are have already seen some signs of instability as Service sector growth in the Euro-region dropped from a reading of 58.0 in July to 54.0 last month. While elsewhere, the Purchasing Managers' index of European manufacturing showed that growth in output also slowed in August. The focus this week will invariably fall on the German IFO sentiment index, which is expected to highlight that the recent problems in the U.S combined with credit market turmoil and a rising Euro are beginning to weigh on business confidence.

Data Released 24th September

EU 10:00 Industrial Orders (July)

written by Adam Solomon

Following on from last week, the Pound dropped to the lowest level in well over a year versus the Euro but managed to claw back above the $2.00 barrier against the Dollar as an unexpected rise in retail sales offset criticism of the BoE governor, Mervyn King. With the pace of consumer spending showing few signs of slowing, the UK economy may continue to expand at a moderate pace despite heightened concerns over sentiment following the Northern Rock fiasco. In a speech to the UK treasury select committee, King was forced to vigorously defend his handling of the Northern Rock bailout as the Central Bank finally released over £10 billion in emergency funds to prevent a liquidity crisis. The Pound may continue to decline against the Euro over the coming week despite signs that the downward momentum may have subsided for the time being. Following the problems at Northern Rock, concerns about the banking sector are growing and that may undermine Sterling sentiment in the short-term amid speculation that the Bank of England will need to cut UK interest rates.

The Dollar has fallen to the lowest level on record against the Euro and bounced back above 2.0200 versus the Pound following the Federal Reserve's decision to cut interest rates by 50 basis points last week. The U.S currency has continued to decline against 15 out of 16 of the most actively traded currencies as rumours circulate that the Fed will lower interest rates again before the turn of the year with a 70% chance of rate cut next month. The latest round of economic reports have shown an unexpected rise in jobless claims, sagging retail sales and a morbid outlook for the U.S housing market. Therefore the focus this week will fall on the U.S home sales data, which is expected to show that the depth of the subprime mortgage crisis is intensifying the housing recession while a number of key Fed policy makers are due to speak this week.

The positive sentiment surrounding the Euro has continued to gather momentum over the past week as the single currency rallied above 1.4100 against the Dollar and to the highest level ever recorded. The Euro also made significant gains versus the Pound, dropping briefly under 1.4300 to test the highs from April 2006 amid speculation that the ECB could raise interest rates by a further 25 basis points this year. Despite the increased level of volatility surrounding financial markets of late, the ECB's governing council have retained a tightening bias as the chairman of the Central Bank stated that "upside risks" to inflation remain a concern to policy makers. At the present time only a verbal intervention from the chairman of the ECB, Jean-Claude Trichet or a spate of negative economic reports could seemingly slow the Euro's unprecedented rise against both the Pound and the Dollar. In terms of data, we are have already seen some signs of instability as Service sector growth in the Euro-region dropped from a reading of 58.0 in July to 54.0 last month. While elsewhere, the Purchasing Managers' index of European manufacturing showed that growth in output also slowed in August. The focus this week will invariably fall on the German IFO sentiment index, which is expected to highlight that the recent problems in the U.S combined with credit market turmoil and a rising Euro are beginning to weigh on business confidence.

Data Released 24th September

EU 10:00 Industrial Orders (July)


written by Adam Solomon

Following on from last week, the Pound dropped to the lowest level in well over a year versus the Euro but managed to claw back above the $2.00 barrier against the Dollar as an unexpected rise in retail sales offset criticism of the BoE governor, Mervyn King. With the pace of consumer spending showing few signs of slowing, the UK economy may continue to expand at a moderate pace despite heightened concerns over sentiment following the Northern Rock fiasco. In a speech to the UK treasury select committee, King was forced to vigorously defend his handling of the Northern Rock bailout as the Central Bank finally released over £10 billion in emergency funds to prevent a liquidity crisis. The Pound may continue to decline against the Euro over the coming week despite signs that the downward momentum may have subsided for the time being. Following the problems at Northern Rock, concerns about the banking sector are growing and that may undermine Sterling sentiment in the short-term amid speculation that the Bank of England will need to cut UK interest rates.

The Dollar has fallen to the lowest level on record against the Euro and bounced back above 2.0200 versus the Pound following the Federal Reserve's decision to cut interest rates by 50 basis points last week. The U.S currency has continued to decline against 15 out of 16 of the most actively traded currencies as rumours circulate that the Fed will lower interest rates again before the turn of the year with a 70% chance of rate cut next month. The latest round of economic reports have shown an unexpected rise in jobless claims, sagging retail sales and a morbid outlook for the U.S housing market. Therefore the focus this week will fall on the U.S home sales data, which is expected to show that the depth of the subprime mortgage crisis is intensifying the housing recession while a number of key Fed policy makers are due to speak this week.

The positive sentiment surrounding the Euro has continued to gather momentum over the past week as the single currency rallied above 1.4100 against the Dollar and to the highest level ever recorded. The Euro also made significant gains versus the Pound, dropping briefly under 1.4300 to test the highs from April 2006 amid speculation that the ECB could raise interest rates by a further 25 basis points this year. Despite the increased level of volatility surrounding financial markets of late, the ECB's governing council have retained a tightening bias as the chairman of the Central Bank stated that "upside risks" to inflation remain a concern to policy makers. At the present time only a verbal intervention from the chairman of the ECB, Jean-Claude Trichet or a spate of negative economic reports could seemingly slow the Euro's unprecedented rise against both the Pound and the Dollar. In terms of data, we are have already seen some signs of instability as Service sector growth in the Euro-region dropped from a reading of 58.0 in July to 54.0 last month. While elsewhere, the Purchasing Managers' index of European manufacturing showed that growth in output also slowed in August. The focus this week will invariably fall on the German IFO sentiment index, which is expected to highlight that the recent problems in the U.S combined with credit market turmoil and a rising Euro are beginning to weigh on business confidence.

Data Released 24th September

EU 10:00 Industrial Orders (July)

written by Adam Solomon

The Pound lost further ground against the Euro yesterday but rallied back above the $2.00 barrier versus the Dollar as a host of positive economic reports offset the criticism of the Bank of England governor, Mervyn King, as he explained the Central Bank's reaction to the Northern Rock fiasco.

The Pound received an unexpected and timely boost as UK retail sales rose 0.6 in August following a 0.7% increase the previous month and it seems that higher borrowing costs did little to dampen spending.

The pace of sales was expected to remain unchanged last month but rising house prices and a buoyant labour market are encouraging consumers to borrow and spend with the national debt ever increasing to a record £1.3 trillion.

Elsewhere, the Pound received further support as UK mortgage approvals and monetary supply were also unexpectedly strong but the statement from Mervyn King certainly hampered sentiment. In a speech the UK Treasury select committee, the governor of the Bank of England defended his handling of the Northern Rock bailout and blamed British and European Union laws for hampering the Bank's ability to prevent the worst banking crisis since 1973.

In addition, King extended an extra £10 billion in liquidity to the banking system yesterday, bringing down the three month lending rates and reversing his earlier decision to avoid helping commercial banks in need of emergency funding.

Despite the apparent lack of fundamental data released yesterday, the Euro managed to hold well above the 1.4000 level versus the Dollar and continued to make gains against the Pound as we hover just above that 1.4250 level from April 2006.

Just two years ago, the Euro was trading under 1.2000 against its U.S counterpart and the overwhelming strength of the single currency will certainly begin to slow the European economy in the months ahead.

Since the Euro-zone is so heavily dependent upon export growth, a weak currency will inevitably attract investment from overseas and thusly propel economic expansion while a strong Euro will slow it.

As a result, European economic data is likely to deteriorate in the months ahead as the 1.4000 level against the Dollar begins to have an impact on the overall economy. That may alter the ECB's monetary outlook and prevent policy makers from raising rates beyond 4.0% despite rising oil prices stoking inflationary pressures.

The Euro may struggle to make further gains today as the focus falls on the flash estimate of the Purchasing Managers' index on manufacturing and service sector growth. The report may show a modest contraction in September with manufacturing shrinking to a reading of 54.0 from the previous month, although a figure above 50 indicates expansion.

The overwhelming decline of the Dollar continued to gather momentum yesterday as the U.S currency sank to the lowest level on record against the Euro and a fresh 31-year low versus the Canadian Dollar amid speculation that the Fed will continue cutting interest rates.

The renewed weakness in the Dollar came in the aftermath of a statement from the Fed chairman, Ben Bernanke, who said yesterday that a sell-off in credit markets could intensify the housing recession.

The FOMC took the unprecedented step of cutting U.S interest rates by half a percentage point on Tuesday and may need to ease rates to 4.25% this year in order to prevent the collapse of the subprime mortgage market from the pushing the economy into recession.

Fed fund futures show a 72% chance of a further quarter-point rate cut in the October meeting, bringing the monetary policy of Europe and the U.S ever closer together. Elsewhere, Dollar sentiment was further hampered after an index of leading U.S economic indicators fell by the most in six months in August following lower consumer confidence and a rise in unemployment claims.

Data Released 21st September

EU 09:00 Current Account Balance (July)

EU 09:00 Flash PMI (September)

- Manufacturing

- Services

written by Adam Solomon

The Pound continued to decline against the Euro yesterday, trading through 1.4300 as we look set to test the major support level at 1.4250, the lowest since April 2006, amid growing evidence that the Bank of England will eventually need to cut UK interest rates.

Although the fiasco surrounding Northern Rock has been the catalyst to a major sterling sell-off, a report yesterday indicated that the Bank of England was already concerned about the outlook for the economy and inflation even at the beginning of the month.

Earlier this week, the latest round of inflation numbers showed that consumer prices had dipped again in August while the Bank of England released a statement yesterday saying that the upside balance of risk to inflation had receded.

The minutes from the Bank's last policy meeting showed that the monetary policy committee had voted unanimously to hold interest rates in September, saying that "the outlook was now more uncertain".

The particularly dovish tone of the accompanying statement seems to suggest that the MPC are shifting towards a possible rate cut by the turn of the year as the impact from the credit crisis continues to weigh on sentiment. As a result, the Pound is falling against the majors and is likely to continue to downward momentum ahead of a report this morning, which is expected to show that retail growth failed to accelerate in August.

The Euro has risen to the highest level in almost 18-months versus the Pound and overnight we broke through the 1.4000 barrier against the U.S Dollar to record a fresh all-time high of 1.4065.

Despite the increased level of volatility in financial markets throughout the world, the European Central Bank has retained a tightening bias and the diverging interest rate expectations in Europe and the U.S is making the single currency a far more attractive and somewhat safer commodity than the Dollar.

In addition, economic fundamentals in Europe remain positive with the only piece of data released yesterday showing that producer prices slowed modestly in August. The report represents an early indicator of price pressures in Germany, which were largely in line with initial forecasts, rising 1.0% from this stage last year led by lower costs for energy.

In the wake of the Fed's decision to lower U.S interest rates by half a percentage point, the Dollar has plummeted to a fresh record low against the Euro and pushed back through the $2.00 barrier versus the Pound.

The U.S currency fell against 15 of the 16 most active currencies in the market yesterday amid speculation that the Federal Reserve will cut the benchmark lending rate further after the first reduction since June 2003.

The Dollar also came under intense pressure ahead of a speech from the Fed chairman, Ben Bernanke, later today who is expected to tell a congressional hearing that the U.S housing slump is threatening the pace of economic growth.

Elsewhere, a spate of economic data also hampered dollar sentiment as U.S consumer prices unexpectedly fell for the first time in a year last month following a decline in fuel costs. The report from the labour department showed that prices decreased 0.1% in August as slowing growth and weaker consumer spending are keeping companies from increasing prices.

Data Released 20th September

UK 09:30 Retail Sales (August)

UK 11:00 CBI Monthly Trends Survey (September)

U.S 13:30 Initial Jobless Claims (w/e 22nd September)

U.S 15:00 Leading Indicators (August)

U.S 17:00 Philly Fed Index (September)

written by Adam Solomon

The Dollar fell against both the Pound and the Euro last night following the Federal Reserve's decision to lower its benchmark interest rate by half a percentage point in an attempt to pre-empt an economic slump and thusly spur the biggest rally in U.S stocks since 2003.

The chairman of the Fed, Ben Bernanke, has seemly adopted the same approach as his predecessor Alan Greenspan in reducing rates to avoid a slump rather than waiting for one to occur. The unprecedented decision to lower rates by 50 basis points has followed the increased turmoil surrounding credit markets in the wake of the U.S subprime mortgage crisis, which has threatened to curb the pace of global growth.

The cut may also help alleviate the worst housing recession since 1991 while the Fed also cut the discount lending rate and provided the biggest confidence boost to financial markets that investors could have hoped for.

In the accompanying statement, policy makers, who voted unanimously to lower rates by half a percent, took a non-committal stance on future policy and left the door open for further monetary easing.

Therefore, Fed fund futures are currently pricing in another 50 basis point cut before the end of the year as the risks to economic growth clearly outweigh the risks to inflation. As a result, the Dollar has tumbled against the majors, touching a fresh record high against the Euro and trading back above the $2.00 barrier versus the Pound.

The Euro rose to a record high of 1.3985 versus the Dollar last night as the diverging interest rates expectations in Europe and the U.S make the Euro a far more attractive commodity for investors with the market looking to test the 1.4000 level over the coming days.

However, with the single currency also heading towards a two-year high against the Pound, ECB policy makers may be getting increasingly concerned that a strong Euro will eventually curb economic growth, such is Europe's dependence on exports.

In terms of economic data, the Euro failed to make further gains against the Pound yesterday as a report from the ZEW centre of economic research showed that German investor confidence had fallen by more than expected in September. The survey for investor and analyst expectations dropped to the lowest level since December as rising defaults on U.S subprime mortgages pushed up credit costs.

The decision from the Federal Reserve to cut U.S interest rates brought the Pound back above the $2.00 level last night as severe Dollar weakness overshadowed growing concerns about the UK economy.

The furore surrounding the UK's fifth biggest mortgage lender, Northern Rock, has forced the Bank of England to release emergency funding to commercial banks and financial institutions as the credit slump threatens to curb consumer confidence.

In addition, a report yesterday showed that the annual rate of UK inflation had unexpectedly fallen to the lowest level since March 2006 last month with consumer prices rising just 1.8% from a year earlier compared with 1.9% in July. It is the second month in succession that inflation has remained under the government's 2.0% target and gives the Bank of England the scope to reduce interest rates in response to a worsening credit market slump.

UK inflation has slowed from a decade-high of 3.1% in March to just 1.8% less than six months later and with signs that the housing market is slowing, the Central Bank may have little choice but to lower the benchmark lending rate over the next quarter.

Therefore, the focus this morning will fall on the minutes from the Bank of England's last policy-setting meeting where the MPC elected to hold interest rates at 5.25% and a unanimous decision may be negative for the Pound.

Data Released 19th September

UK 09:30 Minutes 5-6 September MPC meeting

U.S 13:30 Consumer Price Index (August)

U.S 13:30 Housing Starts (August)

written by Adam Solomon

The Pound continued to decline for the fourth straight day against the Dollar, dropping through the $2.00 barrier while also falling below 1.4400 versus the Euro as the impact of the credit crunch surrounding Northern Rock and other financial institutions continues to weigh on sentiment.

The overwhelming decline of the Pound looks set to continue this week despite the best efforts of the UK Chancellor, Alistair Darling, who announced yesterday that the government will guarantee all deposits of Northern Rock account holders.

However, his comments did little to ease concerns and the wave of depositors withdrawing savings from UK banks, including Northern Rock, provides an indication that consumer confidence has been hit hard from this financial crisis.

As a result, the Bank of England have little choice but to lean towards monetary easing over the coming months although the latest assurances from the government will probably see interest rates remain on hold until the first quarter of 2008.

In terms of economic data, the focus this morning will fall on the latest round of inflation numbers with consumer prices expected to drive higher over the last month following the significant rise in oil prices and the drop in Sterling. The annual rate of UK inflation fell below the 2.0% threshold in July, dropping 0.6% from the previous month after the Bank of England raised interest rates on five separate occasions over the past year.

The positive sentiment surrounding the Euro continued to gather momentum yesterday as the single currency traded at a near-eighteen month high versus the Pound and also hovered near the record highs against the Dollar.

The German ZEW survey for business confidence is due for release this morning and is expected to show a sharp drop in sentiment as the volatility in credit markets drives borrowing costs higher. The German economy is heavily reliant on export growth, making Germany vulnerable to a global slowdown and although this should be negative for the Euro, the impact should be limited.

The focus today will inevitably fall on the FOMC interest rate announcement this evening and it will be viewed as a crucial event in terms of direction of the Dollar over the coming weeks.

The impact of the U.S subprime mortgage crisis on global financial markets has seen the market anticipate the first adjustment in U.S monetary policy in over a year with the Fed expected to cut interest rates by at least 25 basis points.

However, Fed fund futures are currently pricing in a greater than 50% chance that policy makers will reduce the benchmark lending rate by half a percentage point and anything less than this could prove a disappointing outcome and limit the Dollar's decline.

The chairman of the Fed Reserve, Ben Bernanke, has the unenviable task of weighing up the risks of a recession against shrinking investor confidence and while a quarter-point reduction may not be enough to bolster growth, a half a point cut may fan inflation.

Data Released 18th September

UK 09:30 Consumer Price Index (August)

- Retail Price Index

GER 10:00 ZEW Expectations Balance (September)

U.S 13:30 Producer Price Index (August)

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

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

U.S 19:00 FOMC Rate Announcement

written by Adam Solomon

Following on from last week, the Pound fell to the lowest level in well over a year versus the Euro and has also fallen through the $2.00 barrier against the U.S Dollar after the UK mortgage lender, Northern Rock, received the largest amount of emergency funding in over 30 years.

As a result, the Pound posted its biggest weekly decline in nearly two years against the Euro as the credit crunch surrounding Northern Rock forced the lender to seek emergency cash from the Bank of England in order to ease a "severe liquidity squeeze."

The subsequent reaction from the general public is likely to cause a significant drop in consumer confidence over the coming months and that may increase speculation that the monetary policy committee may need to cut interest rates early next year.

The focus this week will fall largely on the minutes from the Bank of England's last policy meeting where the voting pattern of the committee will be revealed in addition to the tone of the discussions. The nine-strong panel are widely expected to have voted unanimously to hold interest rates in September given the problems surrounding financial markets.

Since breaking through the trend support last week, the Pound dropped 2.0% versus the Euro by the close of trading on Friday while the market is now looking particularly "over-sold" and therefore a technical bounce is likely over the coming days.

The Euro has made strong gains against the majors over the past week as the diverging interest expectations between Europe and the U.S sent the pair to a fresh record high on Thursday.

The single currency also rose an incredible 2.0% versus the ailing Pound as a number of hawkish statements from ECB officials increased speculation that the governing council will lift interest rates again this year.

In the short-term the market is now taking an oversold position and we can expect a sharp bounce upwards over the next few days. However, the technical picture still points to further downside movement and any hint of a UK rate cut could send the Pound
under 1.4200 for the first time in over 2-years.

There is a fundamental lack of economic data released this week with the focus falling on the German ZEW expectations balance while the market will also pay particular attention to ECB comments on Friday with a number of members due to speak including the Chairman, Jean-Claude Trichet.

The decline of the Pound has helped the Dollar penetrate the $2.00 level this morning but the U.S currency continues to struggle against the Euro amid speculation that the Federal Reserve will cut U.S interest rates tomorrow night.

Following on from last week, the Dollar was also hampered by reports that retail sales growth rose less than initial forecasts in August with sales rising just 0.3% from July. The report from the Commerce Department will only add to calls for an interest rate cut this week and the Fed are expected to ease rates by 0.25% with the tone of the statement also indicating further cuts in the pipeline.

There is also a plethora of significant economic reports released this week with the focus falling on the latest consumer price data, which is expected to show that the annual rate of inflation has dropped to 2.2% in August.

Data Released 17th September

EU 10:00 Trade Balance (July)

U.S 13:30 Empire State Index (September)

written by Adam Solomon

Just a few weeks ago most economists were expecting the Bank of England to raise borrowing costs to 6% at the September meeting. Stock markets were strong, inflation risks were still deemed to outweigh growth concerns, the housing market was firm and credit was still easily accessible. Unsurprisingly with this backdrop, sterling was enjoying a strong run against most major currencies, hitting 2.06+ against the US dollar, and 1.4950 against the Euro. Fast forward six weeks, and things look very different. It is now widely accepted that interest rates have peaked at 5.75% in the UK, while in Europe further rate increases are still on the cards. British homeowners previously worried about rising mortgage costs will be breathing a sigh of relief, but for anyone looking to buy a home abroad, particularly in Europe, the changing interest rate outlook is already having a serious impact on the cost of their purchase.

Previous expectations of a rate hike to 6% gave sterling a 2% yield advantage over the Euro (which yields 4%), helping the pound tread water through the summer months. The recent financial market turmoil triggered by the US sub prime mortgage crisis sent ripples through the world's financial markets, prompting central banks to take drastic action by providing cheaper credit to the banking system in order to avert a credit crunch. The Bank of England is the only major central bank not to take action in this way, reluctant to contribute to what it sees as a "moral hazard". "If you protect someone too well against an unwanted outcome, that person (or bank) may behave even more recklessly".

Clearly not prepared to bail out the banks, the BoE are not so reticent when it comes to the consumer. The danger posed by a consumer led downturn now outweighs inflationary risks for the first time in nearly two years, making further rate increases very unlikely. The market has been adjusting to the new scenario over the last few days, leading to a steep fall in the sterling/euro rate. Notably, sterling fell below long term trend support last week, leading to warnings of further downside from technical analysts at TorFX, who follow price trends in the hope of predicting future direction. In a special market update on Wednesday morning (12th), clients were alerted to the "precarious" technical outlook. By the end of the day, the pound had lost nearly 2% on week, which translates into an extra £3,500 on the cost of a European property priced at €250,000. Sterling suffered even larger falls against other European currencies this week, down over 3% against the Polish Zloty and Swedish Krona. However, buyers of the Australian and New Zealand currencies have seen exchange rates rocket by over 10% in the last few weeks as investors dumped high yielding currencies which are perceived as risky in the current climate. That is resulting in massive savings for anyone buying property in these territories.

"We are seeing record trading volumes in the Australasian currencies. Clients are increasingly using forward contracts* to lock in favorable exchange rates, taking advantage of the current volatility. Conversely, clients buying in Europe are also booking forward, but for the opposite reason. They see the weakness in the exchange rate, and would rather fix their rate than face further losses." said Jon Beddell of TorFX.

*( a forward contract allow the buyer to reserve currency at today's exchange rate for up to one year ahead, with only a small deposit required, removing the risk of exchange rate movements from their transaction)

In his first public comments since the credit crisis emerged, Bank of England governor Mervyn King yesterday recognized the potential impact on the consumer if banks start to pass on the higher borrowing costs they now face in the interbank loans market. The LIBOR rate (the rate at which banks can borrow from one another) has risen sharply above the Bank's base rate, and in the absence of cheap loans from the BoE, these costs will eventually be paid by the consumer in the form of higher mortgage payments.

Of course, what most foreign property buyers want to know, is where the pound will go next. If history is anything to go by, markets tend to swing far beyond expectations. The pound hit 1.5300 in January, seeming to defy even the most bullish expectations as the Bank of England surprised the market with an unexpected rate hike.

Considering the shaky outlook for stock markets, recent figures showing a sharp decline in inflation, an apparent slowdown in house price growth, and a dip in consumer confidence, the argument for a rate cut cannot be far away. Current market expectations are for a 10% chance of an October rate hike, and 0% chance of a cut. Given how quickly the outlook has changed in the last few weeks, it is entirely likely that by November, the debate for a cut in interest rates will be "in the market", which could send sterling sharply lower unless the ECB also ease borrowing costs. If the market overshoot mirrors the move we saw in January, that would imply an exchange rate of 1.4250.

The recent negative sentiment surrounding the Pound gathered momentum last night as the UK currency fell to the lowest level in 14-months versus the Euro amid reports that UK lender Northern Rock plc sought emergency funding from the Bank of England.

Britain's fifth largest mortgage lender requested a short-term credit line with the loan to be made at a "punitive" rate of interest in order to avert a credit crisis as the impact from the U.S subprime mortgage fiasco threatens more and more entities worldwide.

The Bank of England unexpectedly relaxed restrictions on financial institutions and encouraged them to lend each other more in an attempt to reduce the overnight lending rate that is threatening to curb the pace of economic growth. The move comes only 24hrs after the governor of the Bank of England, Mervyn King, refused to relax the tough policy of loaning funds below the base rate because policy makers can't afford to "encourage excessive risk taking."

In the aftermath of the report, the Pound declined for a sixth straight day against the Euro and also headed for a weekly loss against 15 out of the 16 most active currencies on speculation that the Central Bank will delay a further rate increase. Sellers of Sterling may will be well placed to take advantage of the current rate of exchange before further downside moves are likely over the coming week.

The Euro smashed through the support level at 1.4555 against the Pound and also rose to a fresh record high versus the Dollar yesterday as the single currency prevailed amid increased speculation that the ECB would continue to tighten interest rates.

The Central Bank elected to hold rates steady this month and altered the tone and language in the accompanying statement to suggest that rates may remain on hold amid the increased turmoil in global financial markets.

However, recent commentary from ECB governing council member, Yves Mersch, helped propel the Euro higher yesterday as he stated that the Central Bank "may resume tightening" depending on the analysis of new economic data.

The hawkish bias is particularly pertinent amid reports that the Federal Reserve are likely to cut interest rates this month while the President, Jean-Claude Trichet, continues to call monetary policy "accommodative."

The Dollar established a fresh record low against the Euro for the second day in succession as we tentatively approach the 1.4000 level amid reports that the U.S Federal Reserve will have little option but to lower borrowing costs next week.

However, the Dollar has found some support this morning and is currently holding under 1.3900 ahead of U.S data released today that will surely have a bearing on the decision next Tuesday.

Retail sales growth in August is expected to show that spending accelerated last month while consumer confidence was near the lowest level since August 2006 as investors decrease bets that the Fed will lower rates by 50 bias points to 4.75% and cut the U.S yield advantage over Europe.

The Dollar has also made significant gains against the Pound with a host of U.S economic data due for release this afternoon with the U.S current account deficit expected to narrow in the second quarter while industrial production probably increased 0.3% last month.

Data Released 14th September

EU 10:00 HICP (August Final)

U.S 13:30 Export & Import Prices (August)

U.S 13:30 Current Account (Q2)

U.S 14:15 Industrial Production (August)

U.S 15:00 Business Inventories (July)

U.S 15:00 Michigan Sentiment (September Prelim)

written by Adam Solomon

The Pound declined heavily against the Euro yesterday, plummeting through the major support level at 1.4650 and also made losses versus the Dollar amid speculation that UK interest rates will remain on hold for the remainder of the year.

The Governor of the Bank of England, Mervyn King, remained defiant yesterday and refused to relax the Bank's stringent policy of loaning money below the base rate in order to provide some relief to commercial bank's and prevent a credit crisis.

In a written testimony to the UK Parliament's Treasury Committee, King outlined that the provision of extra liquidity encourages excessive risk taking and "sows the seeds of a future financial crisis". The Bank of England have so far been more reluctant than the U.S Federal Reserve or the ECB who between them have released over $400 billion in emergency funds to help banks cope with the collapse in the Subprime mortgage market.

In terms of economic data, the Pound failed to find any support as the UK claimant count showed that unemployment had declined to lowest level in over two years last month. The report points to broad-based growth in the economy while average hourly earnings rose significantly in the three months through July, stoking inflationary concerns.

The heightened concerns surrounding the U.S economy continued to hamper Dollar sentiment yesterday as the U.S currency fell to a fresh record low versus the Euro, trading above 1.3900 by the close of trading last night.

The speculation surrounding U.S interest rates continues to be the driving force in the market and with the Fed likely to reduce the benchmark lending rate in a matter of days, the shrinking gap between the U.S and Europe is pulling investors out of the Dollar.

In addition, the U.S currency declined for a sixth straight day, which represents the longest losing steak since April, after the National Association of Realtors cut its home sales forecast this year amid concerns that the housing slump is spreading to other areas of the economy.

U.S existing home sales have fallen 8.6% this year, exceeding initial estimates only a month ago while new-home sales are projected to decline 24% on top of an 18% fall in 2006.

Growth in the labour market has propelled consumer spending this year, which has seen the economy expand at a moderate pace but following the nonfarm payrolls report last week, the Dollar has fallen over 1% amid speculation that the Fed will need to shed interest rates by 50 basis points.

The positive momentum surrounding the Euro has continued to gather pace as the single currency looks evermore likely to test the 1.4000 level against the Dollar while also sailing through the trend support at 1.4650 versus the Pound.

An unexpected rise in European industrial production saw the pace of activity jump a massive 0.6% in July while labour costs also rose from an upwardly revised 2.3% to 2.5% in the second quarter.

The overwhelming strength of the Euro can be sourced from the diverging monetary policy outlooks in the U.S and the Euro-zone as the ECB look to retain a tightening bias and the Fed prepare to cut interest rates later this month.

In addition, it seems that a strong Euro has had a much more muted affect on exporters than earlier in the year amid suggestions from Germany that the Euro's dramatic appreciation against the Dollar won't have a negative impact on the economy.

Data Released 12th September

EU 09:00 ECB Monthly Bulletin Published

U.S 13:30 Initial Jobless Claims (w/e 8th September)

written by Adam Solomon

The Dollar continued to decline against the majors yesterday, falling to within a breath of the all-time low versus the Euro as growing concerns over the U.S economy continue to dominate.

The U.S currency has made losses for five consecutive trading sessions and that trend is likely to continue over the coming week as we build up to the FOMC interest rate announcement on the 18th September.

The stock market rallied 185 points by the close of trading last night, which provides an indication that equity traders fully expect the Federal Reserve to cut interest rates by 25 basis points in September and even that may be viewed as a disappointment. The consequences of not lowering borrowing costs would see an entire repricing of the yield curve and the likelihood of a collapse in the stock market.

Therefore, the Federal Reserve are likely to begin monetary easing this month and a quarter point cut in rates will still be negative for the Dollar as investors will begin to look outside the U.S for a higher yield. In terms of economic data, the Dollar remained largely unaffected following a report from the Commerce Department as the U.S trade deficit unexpectedly narrowed in July.

The positive sentiment surrounding the Euro continued to gather momentum yesterday as the single currency rose to a near record high versus the Dollar and also made modest gains against the Pound despite the fundamental lack of economic data released.

The recent strength of the Euro can be derived from a statement from the chairman of Central Bank, Jean-Claude Trichet, who gave a testimony to the EU Parliament on Monday and reassured markets that their expectations for growth had not changed. In addition, the ECB have retained a tightening bias with regards monetary policy as Trichet stated that inflationary pressures remain to the upside and that could prompt a further quarter-point rate hike before the turn of the year.

The Euro may continue to make gains this morning amid the release of Euro-zone industrial production, which is expected to show that manufacturing activity in the region remained strong in July.

The Pound managed to continue making gains against the Dollar yesterday but fell a further 0.1% versus the Euro amid a spate of negative economic reports, which saw the UK trade deficit widen as the non-EU gap reached a record level in July.

Nevertheless, the market's attention is focused solely on interest rate expectations at present and the Bank of England have yet to confirm whether UK borrowing costs will remain on hold for the remainder of the year.

The outlook for UK economic growth still remains positive with the economy poised to record its best performance since 2004 amid low unemployment and robust growth in the housing market.

Therefore, the focus this morning with fall on average hourly earnings through the 3 months to July and the unemployment report, which is expected to show that the jobless rate fell to a 2-year low in August.

Data Released 12th September

UK 09:30 Average Hourly Earnings (3 months to July)

UK 09:30 Claimant Count Unemployment (August)

EU 10:00 Industrial Production (July)

written by Adam Solomon

The Pound declined against both the Euro and the Dollar yesterday following a report from the Office of National Statistics, which showed that UK producer prices rose by much less than anticipated in August.

Input prices fell 0.5% while output PPI increased by a modest 0.1% from the previous month and suggests that moderating inflationary concerns will convince the Bank of England to leave interest rates on hold for the remainder of the year.

The UK economy is headed for its best performance since 2004 and the BoE released a statement last week that key inflation indicators "remain somewhat elevated". However, the report yesterday will provide some relief to policy makers as the MPC attempt to gauge the risk to economic growth from the overwhelming surge in credit costs.

Elsewhere, the Pound failed to find any support as a report from the DCLG showed that UK house prices rose by 2% in July to an average of £218,479. The annual rate of house price inflation increased from 12.1% to 12.4%, the highest since March 2005, despite five interest rate increases in the past year.

The Pound may also struggle to make any also struggle to make gains today amid the release of the UK trade balance, which is expected to show that the deficit in goods and services widened in July.

The Euro came within a whisker of a fresh record high against the Dollar yesterday and also made modest gains versus the Pound as strong French economic data combined with the growing concerns about the U.S economy saw the Euro rally for a fourth straight day.

French industrial production increased 1.3% in July, which provides an indication that a recovery in economic growth will support the ECB's still hawkish monetary policy. Following the less than convincing statement from the chairman of the Central Bank last week, the market has been pricing in the probability that Euro-zone interest rates will remain on hold for the remainder of the year.

However, the tone and language used in the statement suggests that policy makers still view upside risks to price stability and that is expected to keep the ECB from lowering interest rates.

The focus today will fall on Jean-Claude Trichet's testimony to the EU Parliament over the U.S subprime mortgage crisis, which is expected to attract plenty of attention given the current level of uncertainty surrounding the next move in Euro-zone interest rates.

The Dollar has been under considerable pressure against the Euro since last Friday as the impact from the non-farm payrolls report is paving the way for a minimum 25 basis points cut in U.S interest rates this month.

The FOMC meeting on the 18th September is attracting particular interest as the market is currently pricing in a greater than 50% chance of a half point cut. In addition, the probability that the Fed will lower rates by as much as 75 basis points is now greater than the chance that they will leave rates on hold and yet a number of Fed officials continue to try and pacify the market's fears.

The Atlanta Fed Present, Lockhart, stated that despite a weakening labour market, consumer spending will continue to support economic growth this year and therefore the focus this week will fall on the retail sales report on Friday.

The Dollar has fallen to a near record low against the Euro and is likely to continue to decline against the majors ahead of the U.S trade data this afternoon. The deficit in goods and services probably widened in July as rising oil costs offset the rise in U.S exports with the gap growing to $59 billion from $58.1 billion in June.

Data Released 11th September

UK 09:30 Trade Balance (July)

U.S 13:30 Trade Balance (July)

written by Adam Solomon

Following on from last week, the negative sentiment surrounding the Dollar continued on Friday as the U.S currency declined back above 2.0300 versus the Pound following a surprisingly weak report on the U.S labour market.

Initial forecasts seemed to suggest that economists were looking for U.S companies to have added 100,000 jobs to payrolls last month. However, the report was much worse than anticipated as non-farm payrolls had dropped for the first time in four years on a month-to-month basis while the July numbers were also revised down from 92,000 to just 68,000.

The shocking extent of this contraction will provide increased speculation that the Federal Reserve will have no choice but to cut interest rates on the 18th September. The only thing to consider now will be whether policy makers elect to ease rates by 25 or 50 basis points as the impact from the subprime mortgage and credit crisis spreads to the real economy.

U.S economic growth has been largely dependent on a strong labour market this year and the report last week will shift the focus onto the retail sales numbers on Friday as the job losses points to weak consumer spending in the months ahead as well as the increased risk of recession.

The Euro remained largely unchanged against the Pound last week and also made sharp gains versus the Dollar despite the ECB's decision to hold interest rates in September.

The increased volatility surrounding financial markets has provided further speculation that the fallout from the U.S subprime mortgage crisis will force the Central Bank to leave rates on hold for the remainder of the year.

Over the past month, the ECB has been forced to lend emergency liquidity to banks and released upto €42.25 billion into European money markets last week in attempt to bring some stability back to the market. As a result, the governing council neglected to lift rates this month and in the accompanying press conference, the chairman, Jean-Claude Trichet, indicated that policy makers are willing to wait and see if the subprime credit crisis is likely to slow economic growth.

The focus this week will fall on Trichet's testimony to the EU parliament, which is expected to attract plenty on attention, particularly given the level of uncertainty regarding the next move in euro-zone interest rates.

The Pound has been gathering momentum against the Dollar over the past week and has also remained firm versus the Euro amid a spate of positive economic reports, which have shown that the UK economy remains in good health despite the impact of the crisis in the U.S.

However, a report from the National Institute for Economic and Social Research last week showed that UK economic growth slowed in the three months through August and may continue to moderate following five interest rate hikes in the past year. The economy expanded 0.7% in the third quarter, down from 0.9% in the three months through May as the NIESR maintains that the Bank of England has "no need" to lift interest rates again this year.

There is a plethora of significant economic reports released this week including a number of house price surveys, the producer price index and unemployment count, which are all expected to be strong and are unlikely to change the markets view that rates are on hold for the foreseeable future.

Data Released 10th September

UK 09:30 DCLG House Prices (July)

UK 09:30 Producer Price Index (August)

written by Adam Solomon

The Euro managed to claw back some gains against the Pound yesterday and also remained largely unchanged versus the Dollar despite the ECB's decision to hold interest rates at 4.00% in September.

Amid the increased volatility in financial markets in recent weeks, the European Central Bank neglected to lift borrowing costs despite a strong indication of a rate increase in August. The chairman of the ECB, Jean-Claude Trichet, stated last month that "strong vigilance" would be required to ensure that risks to price stability do not materialize.

However, with the increased uncertainty surrounding credit markets, the ECB has been forced to lend emergency cash to banks and released upto €42.25 billion into money markets yesterday in an attempt to stem the losses incurred from the U.S subprime mortgage crisis.

In the aftermath of the rate announcement, Trichet stated that the governing council voted unanimously to keep interest rates unchanged this month and are prepared to wait and see whether the turmoil surrounding financial markets will slow economic growth. In the accompanying press conference, it was clear that the ECB would adopt a neutral stance over the coming months and a further rate increase would depend on a number of economic factors.

The Pound held firm against the Dollar yesterday but made moderate losses versus the Euro following the Bank of England's decision to hold UK interest rates at 5.75% as the MPC attempt to determine whether a surge in credit costs will hamper growth in the economy.

The Monetary policy committee, led by the governor Mervyn King, kept the benchmark lending rate at a six year high this month but we will have to wait until the 19th September to gauge how the nine-strong committee voted. In the accompanying statement released yesterday, the BoE declared that "the recent solid pace of output growth has been sustained" while "it is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households."

This was the first time since May 1999 that the Bank of England have issued a statement after keeping interest rates unchanged and the last time they did, policy makers lowered interest rates the following month.

In terms of economic data, a report from the National Institute of Economic and Social Research showed that UK economic growth slowed in the three months through August.

Although the focus will fall squarely on the monthly U.S job report this afternoon, the Dollar has been under pressure amid speculation that the Federal Reserve will cut interest rates later this month.

The uncertainty surrounding bond and stock markets could be further exasperated if the Fed fail to meet market expectations and delay an inevitable rate cut for another month. Therefore, the Nonfarm payrolls numbers will be of greater significance as the report may act as a catalyst to the Fed and a weak number would signal that housing recession is spilling over into the broader economy.

The ISM report yesterday showed that growth in the service sector expanded at a faster pace than forecast in August but the employment component of the report dropped back into contractionary territory for the first time since September 2003. However, initial forecasts suggest that U.S job growth picked up in August with employers adding 100,000 workers to payrolls last month following an increase of 92,000 in July.

Data Released 7th September

GER 11:00 Industrial Production (July)

U.S 13:30 NonFarm Payrolls (August)

-Average Earnings

-Unemployment Rate

U.S 15:00 Wholesale Inventories (July)

written by Adam Solomon

The Dollar came under renewed pressure against the majors yesterday as the Dow Jones plunged 150 points over the course of the day, taking carry trades down with it, while another spate of negative economic reports project difficult times ahead for the U.S economy.

During the increased state of turmoil surrounding financial markets over the past month, the Dollar has benefited from the renewed appetite for risk aversion, which saw domestic and international traders flock to the relative safety of U.S treasuries. However, the Dollar plunged against most of the major currencies yesterday and the lack of any positive movement suggests that the outlook for U.S economic growth is becoming so bleak that traders are looking to invest their money elsewhere.

In terms of economic data, the U.S currency made further losses following a report from the National Association of Realtors', which showed that pending home sales plunged by the most since records began in 2001. The two-year housing recession is showing few signs of abating as the index collapsed 12.2% in July after gaining 5% in June with the decline more than five times initial forecasts.

Elsewhere, the ADP employment survey increased by a modest 38,000 in August and the report will provide an insight into the NonFarm payrolls numbers tomorrow and the current state of the U.S labour market.

The Euro has been largely range bound against the Dollar this week and has weakened modestly versus the Pound as we build up to one of the most important events this week, the ECB interest rate announcement. Typically, the European Central Bank prefers to let the market know in advance what they plan to do with regards raising interest rates and the chairman, Trichet, has stated in August that "strong vigilance" will be required in order to prevent the risks to price stability.

However, given the recent move in European bond yields, the Central bank has little option but to keep rates unchanged at 4.00% this lunchtime as inflation also remains under the 2.0% threshold. Although the governing council are likely to hold rates in September, the focus will fall largely on the accompanying statement where Trichet may adopt the same tone and language as in August and thusly leave the door open for further rate increases this year.

However, should the ECB leave rates unchanged and fail to use the same hawkish terminology in the accompanying statement then the Euro should fall significantly against both the Pound and the Dollar. Therefore, Euro buyers would be well advised to place a stop order in the market to protect against a surprise decision from the ECB and counter a possible downward move.

The Pound rose against both the Euro and the Dollar yesterday as we build up to the Bank of England interest rate announcement at midday where the monetary policy committee are widely expected to hold UK interest rates at 5.75%.

Policy makers are becoming increasingly concerned with the moves in bond markets and with inflation below the 2.0% target last month, the MPC can afford to wait and assess the impact of five rate increases over the past year.

Three month sterling rates have jumped to the highest level in over 8-years, which has raised speculation that the Bank of England may need to inject some liquidity into financial markets to shield the economy from higher borrowing costs.

However, unlike the ECB, the Bank of England will release the minutes from the two day meeting later this month and therefore we will have to wait to gauge the chances of a further rate increase this year.

Recent economic reports have shown that growth in manufacturing and service industries continues to accelerate and a report this morning may show that industrial production increased 0.2% in July.

Data Released 6th September

UK 09:30 Industrial Production (July)

- Manufacturing Output

UK 12:00 BoE Interest Rate Announcement

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

GER 11:00 Industrial Orders (July)

U.S 13:30 Initial Jobless Claims (w/e 1st September)

U.S 13:30 Labour Costs (Q2)

- Productivity

U.S 15:00 ISN Non-Manufacturing (August)

The Pound snapped a four-day winning streak against the Euro yesterday and also declined significantly versus the U.S Dollar despite continued strength in UK economic data. A report from the British Retail Consortium showed that retail sales rebounded strongly in August while construction spending hit the highest level in nine-years over the same period. The recent spate of positive economic news seems to suggest that the UK economy is immune to the problems in the U.S as strong consumer spending combined with continued growth in the housing market will justify the Bank of England's lack of concern over the volatility surrounding financial markets. UK house prices rose for an eighth consecutive month in August with the average cost of a home climbing 0.4% to £199,700 following a 0.8% increase in July. The report from HBOS plc showed that five interest rate increases over the past year have yet to curb demand for property and that may prompt the Bank of England to lift interest rates to 6.0%. Nevertheless, the Pound declined against the majors but may find some support this morning as growth in the service sector is expected to be strong given that activity in the construction sector has been so strong.

The Euro rebounded strongly against Sterling yesterday but the single currency continued to weaken versus the Dollar as be build up to the ECB interest rate announcement tomorrow. In terms of economic data, producer price inflation was modestly above expectations in July but the annualized pace of economic growth still came in below 2.0% although that is not expected to influence the ECB's monetary policy. However, there is only a slim chance that the governing council will lift interest rates this month as policy makers assess the widespread problems in the financial sector with more German banks expected to report large subprime related losses. In terms of economic data, the Euro may find some support this morning ahead of tomorrow's announcement with the release of the purchasing managers' index, which is expected to show that growth in service industries remained robust in August. Elsewhere, a separate report later today may show that Euro-zone retail sales increased 0.3% from July with the annual pace of sales up 1.0% from this stage last year.

The Dollar benefited from a strong rally in the Dow yesterday, which was up 91 points on the first day of trading in September as the U.S currency rallied almost a point versus the Pound by the close of trading last night. Although this helped lift so-called carry trades, the mixed performance in bond yields suggests that the financial markets have yet to reclaim a strong sense of stability and that may be positive for the Dollar as appetite for risk aversion continues to dominate. There is a plethora of significant economic news released this week and the Dollar seemed to shrug off a particularly negative report on U.S manufacturing yesterday, which grew at the slowest pace in five months in August. The ISM index is one of the first surveys to show how the impact from the mortgage crisis is affecting the economy and points to slower growth over the coming months. Elsewhere, U.S construction spending unexpectedly fell in July to the lowest level since January, indicating that the worst slump in housing since 1990 will continue to hamper economic growth in the third quarter.

Data Released 5th September

UK 09:30 CIPS Services PMI (August)

EU 09:00 Services PMI (August)

EU 10:00 Retail Sales (July)

U.S 13:15 ADP Employment Report (August)

U.S 15:00 Pending Home Sales (July)

U.S 19:00 Fed Beige Book

written by Adam Solomon

The Pound rose for a fourth consecutive day against the Euro and also remained largely unchanged versus the Dollar following a stronger-than-expected report on UK manufacturing activity. The CIPS survey was expected to show that factory output declined in August but the strongest level of growth in nearly 13-years drove the index to a reading of 56.3 and to the highest level since 2004. Although the overall tone of the report seems quite positive, both input and output prices dropped from the previous month and that may convince the Bank of England to keep interest rates on hold in September. The latest round of inflation data showed that consumer prices dropped under the Central Bank's 2.0% target for the first time in over a year in July while evidence that consumer spending is slowing may influence monetary policy in the fourth quarter. The lack of inflationary concerns will allow the Bank of England tome to monitor financial and credit market conditions before deciding on whether to press forward and raise interest rates to a fresh six-year high by the turn of the year.

Aside from the U.S non-farm payrolls report, the European Central Bank interest rate announcement could be the catalyst for a move in the market this week and the Euro has been under pressure following a shift in sentiment from policy makers. Typically, the ECB will let the market know in advance of an impending rate increase but considering the increased volatility in financial markets, the Central Bank may keep the market guessing right up until the midday announcement. The Euro has fallen significantly against both the Pound and the Dollar over the past week amid a spate of dovish comments from a number of members from the ECB's governing council. In terms of economic data, the Euro may come under further pressure this morning as the revised estimate of Eurozone GDP is expected to show that economic growth remained unchanged at an annual rate of 2.5%. Elsewhere, a separate report may show that producer price inflation rose 0.1% on the month in July although annual pace of inflation is expected to drop towards 1.7%.

The U.S Labour Day holiday yesterday saw the Dollar remain largely unchanged against most of the major currencies but considering the packed calendar of U.S economic data this week, we may see increased volatility surrounding the Dollar. The recent statement from the chairman of the Federal Reserve, Ben Bernanke, was as convoluted as ever when he said that the Fed is in a position to do whatever is necessary to provide liquidity to the market. Elsewhere, President Bush announced a new program to help struggling homeowners cope with the impact of the U.S subprime mortgage crisis. However, in the aftermath of the statement from the Fed chairman on Friday, bond markets and carry trades failed to respond and that provided some speculation that a U.S interest rate cut is not yet a done deal. The Dollar may come under further pressure this afternoon amid the release of the ISM manufacturing report, which may show that the pace of activity fell in August.

Data Released 4th September

EU 10:00 GDP (Q2 Revised)

EU 10:00 Producer Price Inflation (July)

U.S 15:00 Construction Spending (July)

U.S 15:00 ISM Manufacturing (August)

written by Adam Solomon

The Pound has continued the upward momentum against both the Euro and the Dollar after significant gains in European stocks encouraged investors to resume carry trades in which traders borrow cheaply in Japan to buy higher-yielding currencies elsewhere. Although appetite for risk is returning to financial markets, investors remain concerned
over events dominating global stock and credit markets and that is likely to set the overall tone again this week. In terms of economic news, the Bank of England are due to convene this week and are expected to keep UK interest rates on hold this Thursday but with the pace of activity remaining robust, the MPC could raise to 6.00% later in the year. As a sense of stability returns to financial markets, the positive momentum surrounding the Pound may continue as European stocks rose for a fourth straight day while the current UK monetary policy is attracting investors back in to sterling, which has risen 6% against the Dollar in the past 12 months.

The Euro struggled to stem the losses against both the Pound and the Dollar last week as the turmoil surrounding European money markets has shifted sentiment away from a possible interest rate increase this week. Earlier in August, the chairman of the ECB, Jean-Claude Trichet, gave a strong indication that rates would need to rise to 4.25% in September to ensure that risks to price stability do not materialize. However, over the past week a number of members of the ECB's governing council have elected to adopt a "dovish" tone with regards monetary policy. Trichet back-peddled in a statement last week to suggest that the Central Bank were not "pre-committed" to raising interest rates this month. Therefore, the focus this week will fall heavily on the ECB interest rate announcement on Thursday with the futures market pricing in a 40% chance of a rate increase this month and that may prompt a further Euro sell off over the course of the week. In terms of economic data, the single currency came under further pressure on Friday as the EC sentiment index showed that European consumer and business confidence dropped further than initial forecasts and to the lowest level in six months.

The Dollar continued to decline against the Pound last week as the recent turmoil surrounding equity and credit markets subsides and a sense of stability returns to financial markets. Initially, the U.S currency made robust gains against most of the high-yielding currencies as investors sought a "safe haven" amid increased volatility, which stock global stock markets plunge and the Fed take steps to lower the overnight lending rate. In terms of economic data, the Dollar failed to find any support despite a surprisingly positive report on U.S consumer spending, which rose by more than initial forecasts in July. The report also highlighted that inflation appears to have moderated and provides an indication that the economy was expanding at the start of the third quarter before credit market deteriorated following U.S subprime mortgage crisis.

Data Released 3rd September

U.S Market Holiday - Labour Day

EU 09:00 Manufacturing PMI (August)

UK 09:30 CIPS Manufacturing PMI (August)

written by Adam Solomon