Daily Insight

The Dollar fell to the lowest level in almost 30-years versus the Pound yesterday and also traded near the all-time highs against the Euro as we build up to the FOMC interest rate announcement this evening.

The decision from the Federal Reserve has been greatly debated over the past few weeks with Fed Fund Futures currently pricing in a 98% probability of a rate cut.

The Dollar has declined significantly in the run up to the announcement amid persistent speculation that policy makers may lower borrowing costs by half a percentage point. The Fed will either acknowledge the downside risks to economic growth or choose to focus almost exclusively on inflation with oil prices still holding above $90 a barrel.

Recent economic reports have shown that consumer spending continues to prop up the economy while the latest round of housing data showed that the slump in the property market shows few signs of abating.

Therefore, the most likely scenario is that the Fed will cut rates by 25 basis points this month and adopt a neutral stance in the accompanying statement, which may prove positive for the U.S Dollar.

Prior to this evening's announcement, the market will be paying particular attention to the advanced GDP report for the third quarter, which is expected to show that economic growth slowed in the three months through to September.

Dollar buyers would be well placed to take advantage of the current rate or at the very least place a stop order in the market to protect against an adverse move this evening.

The diverging interest rate expectations between Europe and the U.S has seen the Euro consolidate above 1.4400 although the single currency made further losses against the Pound as European retail sales declined for the first time in three months.

The index showed that sales fell to a seasonally adjusted reading of 47.9 in October from 50.5 the previous month with a figure below 50 indicating a contraction.

In recent months, consumer price inflation has risen above the ECB's 2.0% target and rising food and energy prices are beginning to weigh on consumer confidence.

The report yesterday will be of concern to policy makers as slowing consumer spending, which accounts for roughly 60% of the European economy, may exacerbate an economic slowdown.

Elsewhere, the Euro received an unexpected boost as reports in Germany continue to surprise to the upside with unemployment dropping to 8.7%, the lowest level since 1993.

The Euro may make further gains against the Dollar this morning as the focus switches to the harmonised index of European consumer prices, which is expected to show that inflationary pressures accelerated in October.

The Pound rallied for a fifth straight day against the Dollar yesterday, rising to the highest level since June 1981 amid speculation that a Fed rate cut would increase the difference in borrowing costs between the U.S and the UK.

Amid slowing economic growth and a worsening housing slump the Fed will reduce the benchmark lending rate to 4.5% while UK policy maker, Kate Barker, yesterday signalled that the Bank of England has no plans cut UK rates from the current 5.75%.

Despite the fundamental lack of economic data, the hawkish tone of the statement from the BoE saw the Pound extend gains against 12 of the 16 most actively traded currencies.

In addition, the positive sentiment surrounding the UK currency continued this morning as a report from the Nationwide Building Society showed that house prices rose at the fastest pace in four months.

The report is at odds with a separate survey from Hometrack Ltd, which suggests that higher credit costs are bringing the decade long housing boom to an end while UK mortgage approvals crashed to the lowest level in 26-years.

Nevertheless, the Bank of England will probably keep interest rates on hold in the near-term and the Pound may continue to make gains against the Dollar as we build up to this evening's crucial announcement.

Data Released 31st October

UK 10:30 Consumer Sentiment Survey (October)

EU 10:00 EC Business Climate (October)

EU 10:00 EC Economic Sentiment (October)

EU 10:00 HICP Flash (October)

EU 10:00 Unemployment (September)

U.S 12:15 ADP Employer Report (October)

U.S 12:30 Advance GDP (Q3)

U.S 13:45 Chicago PMI (October)

U.S 14:00 Construction Spending (September)

U.S 19:15 FOMC Rate Announcement

written by Adam Solomon

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

Following on from last week, the unrelenting decline of the Dollar continued on Friday as the U.S currency fell to yet another record low against the Euro and traded through the resistance at 2.0560 versus the Pound as we build up to the FOMC rate announcement on Wednesday.

In terms of economic data, the Dollar came under further pressure following the University of Michigan consumer confidence survey, which only served to exacerbate concerns of a consumer led recession in the States.

The index was surprisingly revised down to a reading of 80.9 in October, the lowest level since 2006. Elsewhere, the U.S Dollar also found little support as the price of oil continued to trade near the record highs above $90 a barrel amid escalating tensions between the U.S and Iran while Turkish warnings of a broader assault on Kurdish militants isn't helping to curb prices.

There is a host of significant economic reports released in the U.S this week including the ISM manufacturing survey and the nonfarm payrolls numbers on Friday.

Nevertheless, the focus will fall squarely on the FOMC meeting this Wednesday with policy makers expected to lower interest rates by a further 25 basis points. Fed fund futures have fluctuated aggressively over the past week with the market factoring in a 90% probability of a rate cut this month while the tone and content of the accompanying statement may incur further Dollar weakness.

The positive sentiment surrounding the Euro continued to gather momentum last week as the single currency breached the 1.4400 barrier against the U.S Dollar and approached the highest level in two years versus the Pound.

The Euro's gains came despite a weaker-than-expected report consumer confidence, which showed that sentiment had dropped to the lowest level in seven months.

Elsewhere, the Ifo business climate index showed that confidence in Germany fell to the lowest level in nearly two years over the same period as higher interest rates and rising consumer prices put a strain on spending.

The European Central Bank has so far retained a hawkish stance and has reassured the market that a strong Euro won't have a bearing on monetary policy but the governing councul will need to take note of the downside risks to growth that dwindling consumer spending and investor confidence present.

The Pound has been under considerable pressure against most of the major currencies over the past week or so but the UK currency continues to make rapid gains versus the Dollar despite a sparse supply of UK economic data.

The Bank of England issued a particularly gloomy outlook for financial markets on Thursday, noting that credit and equity markets remain "vulnerable to further adjustments".

The tone and language used in the statement seems to suggest that the BoE remains concerned that the slowdown in the U.S and rising credit defaults could trigger further turmoil in global financial markets.

The shift in sentiment does not necessarily mean that policy makers will consider lowering interest rates in the short-term but it does effectively diminish the prospect of any further monetary tightening.

In terms of economic data, the Pound may struggle to make gains amid the release of a report on the UK housing market, which may show that prices fell for the first time in two years this month.

Data Released 29th October

UK 09:30 Mortgage Applications (September)

written by Adam Solomon

The overwhelming decline of the Dollar continued yesterday as the U.S currency plummeted to the lowest level on record against the Euro while also trading up through 2.0500 versus the Pound amid speculation that a slowing economy will see the Fed lower interest rates at the end of the month.

The Dollar is poised to record its third consecutive weekly decline against the Euro following an unexpectedly weak report on U.S durable goods orders.

The report from the Commerce Department showed that orders for items made to last several years fell 1.7% in September as a slump in military equipment off set the increase in business investment.

Nevertheless, a weak Dollar and rising overseas demand will see U.S exports rocket higher, helping to prevent the housing recession from slowing the broader economy.

Elsewhere, a separate report on the U.S housing market showed that the index of new home sales actually rose 4.8% in September following a strong revision in the August figures.

However, there was minimal reaction in the market as speculation on U.S interest rates continues to drive Dollar weakness and we may see further losses today ahead of a report on consumer sentiment in the Michigan region.

The Euro made strong gains against the Pound yesterday and also traded up through the previous record high versus the Dollar despite a report on German business confidence, which dropped to the lowest level in nearly two years.

The Ifo sentiment index fell to a reading of 103.9 from 104.2 in September after the Euro's advance to a record level combined with rising oil prices threatened to curb economic expansion.

The price of oil rose above $92 a barrel last night and we have seen an incredible 74% jump in prices in under a year while higher credit costs sparked by defaults in U.S subprime mortgages may slow the European economy.

Nevertheless, import prices in Germany have accelerated more than initial forecasts in September, rising 0.6% from the previous month led by the increase in fuel costs.

The report will only serve to heighten suggestions that the European Central Bank will keep interest rates steady at 4.0% while retaining a tightening bias.

Rising oil prices will inevitably raise inflationary pressures and with consumer prices rising above the 2.0% ceiling for the first time in well over a year, the ECB will be ever more concerned with the risks to price stability.

Data Released 26th October

EU 09:00 M3 (September)

- 3 month moving average

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

written by Adam Solomon

By the close of trading last night, the Dollar stood virtually unchanged against the Pound as we continue to test the resistance around 2.0500 while the U.S currency also remains subdued versus the Euro amid a dismal report on the housing market.

Sales of existing homes in the U.S fell a further 8% in September and to an annual rate of 5.04 million, the fewest number since records began in 1999.

The report from the National Association of Realtors showed that the decline was nearly twice as steep as initial forecasts with the median price of a home dropping to the lowest level in a year.

In the aftermath of the report, Fed fund futures suggested a 100% probability that the Federal Reserve will lower interest rates next Wednesday. The Dollar came under further pressure amid some speculation that policy makers will cut rates by as much as 50 basis points, rather than the projected quarter point reduction.

The report yesterday provides a clear indication of just how dire the U.S property market has become and causes concerns over the negative impact on the broader economy.

Further evidence of the dramatic slump in housing may be realised this afternoon as a second report on the sales of new homes is expected to show that purchases fell 3.1% in September.

Nevertheless, the Dollar may prove more reactive to a separate report on durable goods orders with the headline figure expected to improve 1.5% last month.

The Euro came under further pressure against a resurgent Pound yesterday, trading up towards 1.4400 before the close of trading last night despite a particularly positive report on European service industries.

As commercial banks started to recover from the surge in credit costs sparked by defaults on U.S subprime mortgages, growth in services began to accelerate in October with the index rising to a reading 55.6 from 54.2 the prior month.

However, the purchasing managers' index on European manufacturing showed that growth in the sector actually slowed for a fourth consecutive month with the index falling to a reading of 51.5 from 53.2 in September.

Although a figure above 50 indicates expansion, the consistent decline in output suggests that slower global growth and the Euro's dramatic appreciation against the Dollar is threatening to curb Euro-zone exports.

The single currency has risen to a record high of 1.4349 against the Dollar this week but policy makers within the ECB's governing council seem undeterred and have expressed confidence in the outlook for economic growth.

written by Adam Solomon

The resurgent Pound roared back against the majors yesterday, reversing almost all of Monday’s losses, although the 2.0500 level has provided some resistance for the pair as we closed last night just under this level.

The UK currency also rose significantly against the Euro and looks set to test the trend resistance at 1.4420 as the Pound benefits from increased demand for high-yielding currencies with traders looking to get a better return for their investment.

Sterling continued to rally through the course of the day despite a particularly negative report from the Confederation of British Industry who showed that confidence among UK manufacturers fell to the lowest level in almost two years.

The quarterly index of optimism fell to a reading of minus 13 in October from minus 2 in the three months through July as a strong Pound made British exports more expensive.

The report suggests that growth in the UK economy may have peaked after the Pound reached a 26-year high against the Dollar in July and a rise in credit costs let to a run on deposits at the UK's fifth biggest mortgage lender, Northern Rock plc.

Nevertheless, the Pound may continue to make gains against the Dollar amid speculation that the Bank of England has no intention of cutting UK interest rates in the short-term, particularly since growth in the third quarter far outweighed expectations at an annual rate of 3.3%.

The Euro resumed the upward momentum against the Dollar yesterday but fell 0.4% versus the Pound amid reports that Euro-zone industrial orders were released slightly muted at 5.1% in August.

A strong currency is just starting to weigh on investment demand in the region and although the industrial sector continues to perform well, the pace of output has just started to slump to a slower pace of growth.

There may be further evidence of this in the Flash estimate of the purchasing managers' index this morning with growth in manufacturing expected to slow modestly in October.

However, the Euro may receive a boost as a separate gauge of the report may show that service sector growth remained far more resilient this month as domestic demand is buoyed by a strong labour market.

Elsewhere, a member of the ECB's governing council is due to speak this morning and a hawkish commentary on monetary policy will help propel the Euro higher against majors.

The Dollar resumed the downward momentum against 15 out of the 16 most actively traded currencies yesterday as the release of the Richmond Fed manufacturing index saw the beleaguered currency fall almost two points against the Pound.

The gauge of factory output showed that overall business activity unexpectedly declined to the lowest level in five months in October led by weakness in new orders and domestic demand.

In terms of economic data, the Dollar may continue to decline today amid further evidence that the housing recession is showing few signs of abating.

Sales of existing homes in the U.S probably fell to the lowest level in six years last month with purchases declining 4.5% as the slump in the property market threatens to curtail the pace of economic growth. The collapse in subprime lending will limit consumer’s access to credit and will weigh on sales even more over the coming months.

Data Released 24th October

EU 09:00 Current Account (August)

EU 09:00 Flash PMI - Manufacturing (October)

Services

U.S 15:00 Existing Home Sales (September)

written by Adam Solomon

The Dollar made significant gains against the Pound yesterday, dropping under 2.0300 by the close of trading last night despite a distinct lack of fundamental impetus as the move highlights the speculative nature of the markets in the build up to the FOMC rate announcement.

In the aftermath of the surprisingly uneventful G7 meeting over the weekend, Fed fund futures are currently pricing in an 86% chance of an interest rate cut at the end of the month, down from 92% on Friday.

However, the Federal Open Market Committee has the unenviable task of balancing the obvious risks to price stability against the health of the economy. The headline measure of U.S consumer prices climbed to an annual pace of 2.8% in September as the price of oil continues to rocket towards fresh record highs.

The so called core inflation, which excludes food and energy, has held relatively steady at 2.1% and that may be enough to convince policy makers that a further quarter-point rate cut is needed to avert a further credit crisis.

That sentiment was echoed by the President of the Fed Bank of Chicago, Charles Evans yesterday, who said that policy makers must shield the economy from "high cost" events such as a worsening housing slump.

The positive sentiment surrounding the Euro continued over the weekend as the tone of the G7 meeting failed to address the severe depreciation of the Dollar and the overwhelming strength in the Euro.

It appears that the European Central Bank have resigned to a strong Euro despite growing concerns of the impact on the broader economy and specifically overseas demand for European made products.

Therefore, any hawkish commentary from ECB officials this week or particularly positive economic reports is likely to promote further Euro strength with the single currency hovering just under a record high against the Dollar. The focus today will fall on European industrial orders in August with the report expected to show an increase of 1.0% from the previous month.

The Pound relinquished much of the gains made against the Dollar last week and also fell modestly versus the Euro amid news that that two of the UK's biggest commercial banks were seeking emergency funding.

Following the furore surrounding the fallout from the Northern Rock debacle, Barclay's and the Royal Bank of Scotland will borrow $30 billion between them, sparking additional concerns that the turmoil surrounding credit markets has yet to stabilize.

In addition, these banks are seeking liquidity from the Federal Reserve and not the Bank of England as you would expect with the funds to be used as a contingency and may not even be needed if financial markets improve.

It remains evermore clear that the BoE is reluctant to provide liquidity to the markets and therefore there is little chance of a cut in UK interest rates in the short-term.

Data Released 23rd October

UK 11:00 CBI Monthly Trends (October)

EU 10:00 Industrial Orders (August)

written by Adam Solomon

The Dollar made significant gains against the Pound yesterday, dropping under 2.0300 by the close of trading last night despite a distinct lack of fundamental impetus as the move highlights the speculative nature of the markets in the build up to the FOMC rate announcement.

In the aftermath of the surprisingly uneventful G7 meeting over the weekend, Fed fund futures are currently pricing in an 86% chance of an interest rate cut at the end of the month, down from 92% on Friday.

However, the Federal Open Market Committee has the unenviable task of balancing the obvious risks to price stability against the health of the economy. The headline measure of U.S consumer prices climbed to an annual pace of 2.8% in September as the price of oil continues to rocket towards fresh record highs.

The so called core inflation, which excludes food and energy, has held relatively steady at 2.1% and that may be enough to convince policy makers that a further quarter-point rate cut is needed to avert a further credit crisis.

That sentiment was echoed by the President of the Fed Bank of Chicago, Charles Evans yesterday, who said that policy makers must shield the economy from "high cost" events such as a worsening housing slump.

The positive sentiment surrounding the Euro continued over the weekend as the tone of the G7 meeting failed to address the severe depreciation of the Dollar and the overwhelming strength in the Euro.

It appears that the European Central Bank have resigned to a strong Euro despite growing concerns of the impact on the broader economy and specifically overseas demand for European made products.

Therefore, any hawkish commentary from ECB officials this week or particularly positive economic reports is likely to promote further Euro strength with the single currency hovering just under a record high against the Dollar. The focus today will fall on European industrial orders in August with the report expected to show an increase of 1.0% from the previous month.

The Pound relinquished much of the gains made against the Dollar last week and also fell modestly versus the Euro amid news that that two of the UK's biggest commercial banks were seeking emergency funding.

Following the furore surrounding the fallout from the Northern Rock debacle, Barclay's and the Royal Bank of Scotland will borrow $30 billion between them, sparking additional concerns that the turmoil surrounding credit markets has yet to stabilize.

In addition, these banks are seeking liquidity from the Federal Reserve and not the Bank of England as you would expect with the funds to be used as a contingency and may not even be needed if financial markets improve.

It remains evermore clear that the BoE is reluctant to provide liquidity to the markets and therefore there is little chance of a cut in UK interest rates in the short-term.

Data Released 23rd October

UK 11:00 CBI Monthly Trends (October)

EU 10:00 Industrial Orders (August)

written by Adam Solomon

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

The Pound rocketed through the resistance level at 2.0440 against the Dollar yesterday and peaked just above 2.0500 following a surprisingly positive report on UK retail sales, which rose more than initial forecasts in September.

The fallout from the Northern Rock fiasco has severely dampened consumer confidence and stores have resorted to the biggest discounts in nearly three years in order to attract business.

Sales advanced 0.6% after a similar gain in August with high street prices falling 1.5% this year, the most since January 2005. In the aftermath of the report, the Pound rose 0.4% against the Dollar and from a technical perspective a break above 2.0496 could trigger a clear run towards 2.0650.

However, the Pound failed to make any real ground against the Euro and although service sector growth looks positive at present, the pace of economic expansion is likely to slow over the next year.

The preliminary estimate of UK gross domestic product will be the sole piece of economic data released this morning with growth expected to moderate from 3.1% to 2.3% this year. The UK economy probably expanded at the slowest pace in over year in the third quarter as higher borrowing costs begin to restrain growth.

The Euro rose to a fresh record high against the Dollar yesterday and the single currency also made strong gains versus the Pound despite concerns among the French that a strong Euro will have a damaging effect on the economy.

Nevertheless, the European trade balance showed that the surplus actually increased significantly in the month of August as exports to the U.S remained steady.

The European Central Bank has retained a hawkish bias towards further monetary tightening and the report yesterday would have done little to dampen sentiment and convince the governing council that the economy could withstand a strong currency.

While the Euro remains well under the trend support at 1.4420, the chances of further downside movement is likely over the coming weeks as we look to test the resistance around 1.4250.

The renewed weakness in the Dollar continued to gather momentum yesterday as the single currency sank to a historic low versus the Euro while also peaking at 2.0500 against the Pound.

At the beginning of the week, Fed fund futures were pricing in a 32% chance of an interest rate cut at the end of this month but the overwhelming rise in oil prices combined with dismal economic reports has seen a sharp shift in sentiment.

The latest developments have revived talk of a U.S recession but rising consumer spending and a strong labour market makes this slightly premature.

An index of leading economic indicators increased 0.3% in September as stocks climbed and jobless claims fell. The report reinforces expectations that the two-year housing slump will slow the economy without undoing the expansion that began in 2001.

However, a separate report yesterday showed that growth in manufacturing in the Philadelphia region moderated in October. In the aftermath of the report, the Dollar weakened further amid news that interest rate expectations have risen to a 70% chance of a cut this month as the sharp shift in sentiment saw traders adjust their positions.

Data Released 19th October

UK 09:30 Gross Domestic Product (Q3 Prelim)

written by Adam Solomon

The Pound stood firm against the majors yesterday and even made some gains versus the U.S Dollar despite the release of the minutes from the Bank of England's last policy meeting where the MPC considered a cut in UK interest rates this month.

The nine-strong committee actually voted 8-1 in favour of a no change with only David Blanchflower in favour of a reduction to calm rising credit costs. Some economists have lowered forecasts for UK interest rates following the collapse of the U.S subprime mortgage market, which pushed up borrowing costs while the annual rate of inflation slowed below the Bank's 2.0% target.

Consumer prices held at the lowest level since March 2006 last month and slowing economic growth will inevitably prompt further speculation of a rate cut.

Nevertheless, the Pound found some support when a separate report showed that UK unemployment fell to the lowest level in well over two years in September. The number of people out of work and claiming benefits dropped 12,800 from the previous month while average hourly earnings accelerated 3.7% over the last quarter.

Amid the fallout from the Northern Rock fiasco, a strong labour market will continue to support UK economic growth and provide a boost to consumer confidence.

The Pound may make further gains this morning as UK retail sales increased to 5.5% year-on-year in September from 4.9% at this stage in 2006.

The Euro continues to trade under the trend support at 1.4420 against the Pound and therefore further downside moves are likely over the coming weeks as the European Central Bank's stringent stance on monetary policy continues to drive the single currency.

A number of ECB officials have publicly supported a strong Euro and seem unconcerned with the effects on the economy and more specifically export growth while inflationary pressures in the Euro-zone continues to prompt further speculation of a rate increase.

There is a fundamental lack of economic data released in the Euro-zone this morning with the trade balance the sole number released and if the strength of the Euro was to have any impact on the economy, the most obvious would be trade.

The moves in U.S equities has triggered widespread volatility across the financial markets and the increased appetite for risk aversion has seen the Dollar strengthen against most high-yielding currencies.

The Dollar remained largely unchanged against the Euro but continued to decline against the Pound amid reports that the U.S housing recession deepened in September.

Builders started work on the fewest number of new homes in 14-years, which echoes the Fed's concerns that real estate is the major threat to U.S economic expansion. Housing starts declined 10.2% to an annual pace of 1.191 million last month and the figures will only strengthen the case for Fed policy makers to lower interest rates again in order for the economy to expand at a moderate pace.

The Open Market committee have been quick to stress that persistent inflationary pressures have prevented any further monetary easing with the price of oil rapidly approaching $90 a barrel.

However, a separate report from the Commerce Department showed that U.S consumer prices only rise 0.2% last month following a modest increase in August.

The Dollar is already struggling against 14 of the 16 most actively traded currencies this morning on speculation that the Philly Fed index will show that manufacturing in the Philadelphia region slowed this month, adding to the case for a further reduction in U.S interest rates.

Data Released 17th October

UK 09:30 Retail Sales (September)

EU 10:00 Trade Balance (August)

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

U.S 15:00 Leading Indicators (September)

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

written by Adam Solomon

The Pound was driven lower against both the Euro and the Dollar yesterday, falling 0.3% by the close of trading last night after UK inflation unexpectedly held at the lowest level since March 2006.

Consumer prices rose just 1.8% from this stage last year, the same as August and below the Central Bank's 2.0% target for a third consecutive month, giving the Bank of England the scope to begin cutting interest rates.

Initial forecasts suggested that the rate of inflation would rise to 1.9% in September after a number of hawkish statements from the governor of the Bank of England, Mervyn King.

In a recent speech to the Treasury select committee, King emphasised that policy makers are balancing the impact of higher credit costs on the economy against the risk of persistent inflationary pressures.

However, the report yesterday shows that higher interest rates and the turmoil in financial markets is evoking a crisis in confidence amongst the UK consumer and we can expect the Central Bank to cut the benchmark lending rate from the current 5.75% in the months ahead.

In addition, the Pound has also come under further pressure against the majors this morning as we build up to the release of the minutes from the Bank of England last policy-setting meeting.

The UK currency has fallen 3% since August amid speculation of a rate cut, although the report this morning is expected to show that policy makers voted unanimously to hold borrowing costs unchanged this month.

The Euro has struggled to reach the record highs achieved against the Dollar in recent trading sessions but the single currency managed to make modest gains versus the Pound amid a mixed bag of economic reports.

German consumer price inflation slowed unexpectedly in September while the much anticipated ZEW survey showed that analyst sentiment remained unchanged. Given the unprecedented rise of the Euro over the past few months, the report was expected to show that German investor confidence would continue to decline as demand from overseas wilts.

The index of investor and analyst expectations remained at minus 18.1, the same as in September, as the German stock market continues to rebound, rising 10% in the past two months alone.

The Euro received further support later in the session as ECB council member, Klaus Liebscher, said that the Bank remains focused on "significant" and rising inflationary concerns as 'risks to price stability are clearly pointing to the upside'.

The U.S Dollar was stronger across the board yesterday, rising significantly against both the Pound and the Euro as stock market losses supplement a band of weaker economic reports.

The rally in the U.S currency has little to do with the diminishing probability of a rate cut at the end of this month but more a reflection of the rising appetite for risk aversion as traders bail out of riskier higher yielding currencies in favour of the Dollar.

Elsewhere, the price of oil continues to rocket higher as tensions in the Middle East escalate while the credit crunch in August has unsurprisingly sent trader rushing back to U.S equities.

In terms of economic data, U.S industrial production was in line with initial forecasts although the prior number was revised lower while the housing market continues to struggle as builder confidence fall to another record low in October.

The focus today will fall on the September consumer price index where U.S inflation may have risen 0.2% in September while builders broke ground on the fewest number of new homes in 12-years.

Data Released 17th October

UK 09:30 Minutes BoE MPC Meeting (September)

UK 09:30 Claimant Count Unemployment (September)

UK 09:30 Average Earnings (3 months to August)

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

U.S 13:30 Housing Starts (September)

U.S 13:30 Real Earnings (September)

written by Adam Solomon

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

The renewed appetite for the Pound looked to continue yesterday as the UK currency managed to consolidate above 2.0400 versus the U.S Dollar but had made modest losses against the Euro as we hovered around the trend support at 1.4420.

A recent spate of positive economic reports combined with a particularly hawkish statement from the governor of the BoE, Mervyn King, has seemingly shifted sentiment away from a UK interest rate cut.

In his latest statement, King acknowledged that "even though inflation is close to the target and pay pressures are muted", the Central Bank will continue to look ahead and monitor the risks to inflation that were identified in August.

In terms of economic data, a report from the British Retail Consortium showed that retail sales climbed by the most in three months in September. Revenues at outlets open at least a year rose 3.0% from the same period in 2006 after improving 1.8% in August amid signs that consumers are undeterred by higher credit costs.

However, despite the obvious strength in consumer sentiment, the Pound has come under significant pressure this morning following the release of a report from the Royal Institution of Chartered Surveyors.

UK house prices fell at the fastest pace in two years last month after higher interest rates and concerns over the outlook for the economy weighed heavily on homebuyers' confidence. Subsequently, the Pound has well fallen under the trend support at 1.4420 against the Euro and has also declined heavily against the U.S Dollar.

The positive sentiment surrounding the Euro continued to gather pace yesterday as the single currency rallied against both the Pound and the Dollar amid comments from the German Finance Minister on Tuesday, which helped quash concerns over the Euro's relentless rise.

Over the past year, the European Central Bank have increased borrowing costs steadily and as a monetary policy authority, the governing council seems to respect stability and at the same time despise volatility.

The market is never caught by surprise as the chairman of the ECB, Jean-claude Trichet, uses a specific tone and language to signal a European rate hike a month in advance.

Some quarters of the Euro-zone have been screaming for the Central Bank to intervene and lower interest rates amid concerns that the Euro's 11% rally against the Dollar will weigh heavily on exports.

Nevertheless, the Central Bank have seemingly ignored these pleas and has instead retained a hawkish bias with ECB member Garganas claiming yesterday that borrowing costs still remain at an "accommodative" level.

Therefore, despite the increased turmoil in credit markets and the overwhelming strength of the Euro, the ECB stand ready to act as necessary in the belief that inflation will remain above 2.0% for the remainder of the year.

The Dollar continued to slide against the Euro yesterday and also remained under pressure versus the Pound as the lack of direction surrounding the U.S currency continues to dominate the market.

There have been a host of positive economic reports that have seemingly shifted sentiment away from a probable rate cut this month but thus far the Dollar has failed to react in a positive manner.

Firstly, the U.S employment report showed that the economy added more jobs to payrolls than expected in September while the August contraction was surprisingly wiped out in the revised figures for that month.

The FOMC minutes also failed to result in any cohesive market activity despite the tone of the report suggesting that the Federal Reserve were in no hurry to lower interest rates again after a 50 basis point cut in September.

As a result, interest rate futures drove the possibility of a rate cut down while equity traders saw the Dow drop 80 points yesterday.

Therefore, it seems only a matter of time before the Dollar follows suit and begins to make gains against the Pound and the Euro with the market waiting for the release of the September retail sales report on Friday.

Data Released 11th October

UK 11:00 BCC Manufacturing Survey (Q3)

EU 09:00 ECB Monthly Bulletin Published

EU 10:00 GDP (Q2 Revised)

U.S 13:30 Export / Import Prices (September)

U.S 13:30 Jobless Claims (w/e 13th October)

U.S 13:30 Trade Balance (August)

written by Adam Solomon

In the build-up to the release of the FOMC minutes last night, the renewed appetite for the Dollar saw the U.S currency make further gains against both the Euro and the Pound as Fed policy makers were expected to provide some insight into future policy.

Unfortunately the report failed to deliver any sort of cohesive market activity as the Dollar surprisingly lost ground against Sterling and the Euro, although the reaction in bond markets clearly showed that the minutes should be interpreted as positive for the Dollar.

The tone and language used in the report last night seems to suggest that the Federal Reserve are in no hurry to reduce interest rates again amid signs that the U.S economy will continue to expand.

The Federal Open Market Committee seemingly wanted to avoid a pre-emptive move in the market after lowering interest rates by 50 basis points in September.

A recent spate of positive economic reports have justified their caution as growth in manufacturing and service industries has continued to expand over the past month. As a result, the chances of a further cut in rates this month have been severely reduced as a weak Dollar and higher oil prices may stoke the already persistent inflationary concerns.

Therefore, the U.S currency may rebound sharply against both the Euro and the Pound over the coming weeks and Dollar buyers would be well placed to take advantage of the current rate or at least place a stop order to protect against a downward move.

The Euro managed to rebound against the Pound and the Dollar yesterday after dropping to a two-week low versus the U.S currency amid growing concerns over the current strength of the Euro and the subsequent effects on economic growth.

Nevertheless, the latest comments from Germany's finance minister, who explicitly indicated that he supports a strong currency, seems to suggest that at least parts of the Euro-zone are undeterred with the current level of the Euro.

That sentiment was reflected in a report on the German trade balance, which showed that exports rose by the most in almost a year in August. Overseas sales rose 3.0% from July, the biggest gain since September 2006, as global economic growth helped companies cope with rising oil prices and a strong Euro.

The significance of the regional reports will probably encourage the European Central Bank to retain a tightening bias with regards monetary policy and feel comfortable raising interest rates beyond the current 4.0%.

The Pound dropped to a low of 2.0257 versus the Dollar before a sharp intraday reversal sent the UK currency back towards 2.0350 by the close of the European session.

The move appears to be largely driven by the surprising weakness in the Dollar since it occurred a long time after the UK trade balance. The deficit in goods and services unexpectedly narrowed by less than initial forecasts in August while elsewhere, the Chancellor maintained the government's 2007 growth forecast of 3.0%.

However, a statement from the Bank of England governor, Mervyn King, may have renewed Sterling sentiment as he suggested that the Central Bank would be reluctant to cut interest rates just to protect mortgage lenders from increased credit costs.

In a speech in Northern Ireland yesterday, King emphasised that the current turmoil in financial markets is far from over but that the main objective for policy makers would be to keep inflation close to the 2.0% target. The BoE have lifted UK rates on five separate occasions over the past year, which has seen consumer price inflation fall from a decade high of 3.1% in March to just 1.8% in September.

Data Released 10th October

U.S 15:00 Wholesale Inventories (August)

written by Adam Solomon

The renewed appetite for the Dollar continued to gather pace yesterday as a delayed reaction to Friday's non-farm payrolls report sent the U.S currency higher against both the Euro and the Pound despite the fundamental lack of economic data due to the Columbus Day holiday.

The focus today will inevitably fall on the release of the FOMC minutes from the September 18th monetary policy meeting where the Reserve Bank lowered both Fed funds and the discount rate by 50 basis points each.

Global credit markets have stabilized since policy makers took the pre-emptive action of cutting interest rates by half a percentage point but the tone and language used in the report this evening could trigger further market movement.

One eventuality is that the Fed may have elected to deliver a larger interest rate cut in September in order to avoid successive cuts the following month and not to help the ailing U.S economy.

If that proves the case then the Dollar is likely to make further gains against the majors as the minutes combined with the monthly employment report will allow the Fed to hold rates steady before further monetary easing in December.

The Euro continued to struggle against the majors yesterday, dropping to a near two-week low versus the Dollar amid reports that European Finance Ministers had expressed concerns that the single currency was appreciating too quickly.

The Euro has strengthened 11.3% against the Dollar in the past year alone and Jean-Claude Juncker, the Prime Minister of Luxembourg, has expressed concerns that the Euro's rise is more than enough to reduce global trade imbalances.

The Euro also came under pressure versus the Pound as we look set to test the resistance around 1.4500 before officials hold a second day of meetings today.

Over the past month, ECB President, Jean-Claude Trichet has urged politicians to show "verbal discipline" when discussing the Euro and he is due to testify to the European Parliament in Brussels today.

In terms of economic data, the Euro also struggled to make gains as a report in Germany showed that factory orders only rebounded 1.2% in August following the biggest drop in at least 16-years.

Following the Bank of England's decision not to lower interest rates in October, the Pound has rallied against most of the major currencies but a mixed bag of economic data left the UK currency weaker against the U.S Dollar last night.

The producer price index, which provides a measure of inflation, showed that input prices had risen strongly in September although output prices were much weaker than initial forecasts.

This suggests that despite rising oil prices driving up the cost of raw materials, the higher costs have not yet been passed on to factories even though the annualized pace of industrial production has slowed materially over the past quarter.

As a result, the Pound came under moderate pressure against the Dollar as the Bank of England faces the unenviable task of balancing rising inflationary pressures against slowing economic growth.

Data Released 9th October

UK 09:30 Trade Balance (August)

GER 11:00 Industrial Production (August)

U.S 19:00 Minutes of September FOMC Meeting

written by Adam Solomon

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

The Pound rallied back above 1.4400 against the Euro yesterday and also made gains versus the Dollar as the Bank of England kept its benchmark interest rate unchanged at a six-year high in the lunchtime announcement.

A recent spate of negative economic reports combined with the furore surrounding the Northern Rock fiasco led to some speculation that the MPC would lower rates this month.

However, policy makers felt it necessary to assess the effects of higher credit costs on the economy before a likely rate cut at some point this year. The decision follows increased panic among depositors at Northern Rock after lending rates soared, leaving the lender unable to fund its own business and seek emergency liquidity from the Bank of England.

The run on Northern Rock, the first on a lender in over a century, has clouded the outlook for the UK economy and is bound to have a negative impact on consumer confidence in the months ahead.

Nevertheless, the outcome of the announcement sparked a positive reaction for Sterling as the UK currency rose against both the Euro and the Dollar with the minutes of the two-day meeting scheduled for release later this month.

The Euro came under pressure against the Dollar yesterday and also closed around the support at 1.4420 versus the Pound following the ECB interest rate announcement and accompanying press conference.

As previously anticipated, the Central Bank elected to leave interest rates unchanged in October and finally acknowledged that the rising Euro is threatening to curtail the pace of economic expansion.

A recent survey has indicated that the ECB, who shelved a planned rate increase last month, will wait until April to raise the benchmark lending rate to 4.25%.

The Euro has climbed to a record high against the Dollar this month and has subsequently clouded the outlook for the European export industry. However, policy makers have the unenviable task of managing slowing economic growth against persistent inflationary pressures as consumer prices rose back above the 2.0% ceiling for the first time in over a year.

In the press conference that followed yesterday's announcement, the ECB President, Jean-Claude Trichet, signalled that the Bank is prepared to adopt a wait and see policy with regards any further monetary tightening.

In his statement, Trichet stressed that "particular caution needs to be exercised when assessing the potential impact on the economy" with speculation mounting that the ECB will leave rates unchanged for the remainder of the year.

By the close of trading last night, the Dollar stood virtually unchanged against the Euro and had made modest losses versus the Pound following an industry report from the Commerce Department on durable goods orders.

Bookings placed with U.S factories actually fell by the most in seven months in August as concerns heighten that the turmoil in credit markets will begin to erode business confidence.

Orders declined a greater than forecast 3.3% following a revised 3.4% gain the previous month, which suggests that business investment will slow in the second half of the year as a worsening housing recession continues to weigh on consumer sentiment.

Nevertheless, the Dollar may receive a much-needed boost this afternoon amid the release of the monthly U.S job report. Recent surveys have conveyed a rebound in the labour market last month and the economy is expected to have added 100,000 jobs to payrolls in September.

Data Released 5th October

U.S 13:30 Non Farm Payrolls (September)

- Average Earnings
- Unemployment

written by Adam Solomon

The Pound declined heavily against the Dollar yesterday and also made moderate losses versus the Euro as a lacklustre performance in the UK service sector has heaped further pressure on the Bank of England to lower interest rates.

The recent spate of negative economic reports has painted a worrying picture for the UK economy as house prices fell for the first time in nine months in September.

According to a report from HBOS Plc, the average cost of a home fell 0.6% from the previous month as higher interest rates and a global credit slump cooled demand for property.

The turmoil surrounding credit markets stems from the U.S subprime mortgage crisis and the impact spurred a run on the UK's fifth biggest mortgage lender, Northern Rock plc. The lender has twice gone to the Bank of England to seek emergency funding in order to stay in business and the uncertainty surrounding credit markets may prompt the BoE to provide some relief to the banking system.

Last month the monetary policy committee elected to hold UK interest rates at 5.75%, the highest in six years, as policy makers attempt to weigh the risks to price stability against a surge in credit costs.

In the accompanying statement released, the BoE declared that "it is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households". It is worth noting that it was the first time since May 1999 that the Bank of England have issued a statement after keeping rates unchanged and the last time they did, policy makers lowered interest rates the following month.

As the Euro continues to hold above 1.4000 against the Dollar, the ECB interest rate decision this afternoon will prove one of the main events this week with borrowing costs expected to remain unchanged at 4.00%.

However, the focus, as usual, will fall on the accompanying press conference where the President of the Central Bank, Jean-Claude Trichet, could deliver a statement that delivers sharp volatility.

The ECB have so far been reluctant to comment on the overwhelming strength of the Euro and therefore the market will be looking for any comments designed to slow the Euro's rise.

If Trichet completely avoids discussing the current strength of the single currency then the Euro may well make further gains against the majors as it would send a message that the Central Bank are more concerned with rising consumer prices than with the impact on economic growth.

Consumer price inflation has breached the 2.0% comfort level for the first time in over a year in September and as a result, the ECB may remain staunchly hawkish in the statement this afternoon in order to maintain risks to price stability.

A survey from Bloomberg showed that the Central Bank will wait until April before raising its benchmark interest rate to 4.25% as rising credit costs prompted the ECB to shelve a planned rate increase last month.

The Dollar recovered against both the Pound and the Euro yesterday and made gains for a second day in succession against most of the major currencies amid speculation that the U.S economy added more jobs to payrolls in September.

Last month, seven indicators correctly forecasted a weak payrolls number for the month of August and this time around, six out of those seven including the ADP survey signalled that there will be a sharp improvement.

The ADP employment report confirmed yesterday that the economy added 100,000 jobs to payrolls in September while weekly jobless claims have shown that the number of people out of work and claiming benefits has fallen.

In addition, the components data of the ISM service sector report yesterday showed that the employment component rebounded back into expansionary territory following the first contraction since September 2003.

The prices paid component was also higher in the report and suggests that a weak Dollar is causing renewed inflationary concerns. As a result, the U.S currency headed higher against the Pound and the Euro and may make further gains amid speculation that we could see some official criticism about Dollar weakness at the upcoming G7 meeting.

Data Released 4th October

UK 12:00 BoE Rate Announcement

EU 12:45 ECB Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 29th September)

U.S 15:00 Factory Goods Orders (August)

written by Adam Solomon

The Dollar came under renewed pressure against the Pound yesterday following a report from the National Association of Realtors, which showed that pending home sales fell an incredible 6.5% in August.

The index, based on contracts signed in August, is just the latest example of the overwhelming decline in the U.S property market as lenders become increasingly cautious following the subprime mortgage crisis.

The sharp fall in home sales was way above the 2.1% forecast as the index fell to a reading of 85.5, the lowest level since records began in January 2001. Borrowers are finding it increasingly difficult to secure credit as the housing recession begins to intensify following reports last week that existing home sales dipped to the lowest level in five years.

As a result, the Dollar fell against the Pound and may continue to struggle this afternoon amid the release of the ISM non-manufacturing report, which is expected to show that growth in U.S service industries moderated throughout September.

In addition, the ADP employment report is also due for release and may provide an insight into the monthly U.S job report on Friday, which is expected to show that the economy added more jobs to payrolls last month.

The Pound has been under increased pressure recently but surprisingly made modest gains against both the Euro and the Dollar yesterday as a sense of stability returns to financial markets and investors begin to seek high-yielding currencies for a greater return on their capital.

However, a spate of weak economic data combined with the slim possibility of an interest rate cut this Thursday is likely to weigh on Sterling sentiment and further losses can be anticipated in the build-up to the lunchtime announcement.

Nevertheless, the Pound received an unexpected boost this morning as a report from the Nationwide Building Society showed that UK consumer confidence had increased to a four-month high in September.

The index of sentiment rose to a reading of 99.0, the highest since May, as the lowest rate of unemployment in two years helped consumers look beyond the turmoil surrounding Northern Rock plc. The pick-up in confidence can be largely accredited to a strong labour market but higher interest rates and a surge in credit costs may slow economic growth and hiring later this year.

The recent positive sentiment surrounding the Euro ended in spectacular fashion yesterday as the single currency fell by the largest amount in over a month amid speculation that the ECB will be forced to verbally intervene this Thursday.

There is growing concerns in the Euro-zone that the overwhelming rise of the Euro against it's U.S counterpart will begin to weigh heavily on the economy over the coming months.

An article in the Financial Times yesterday highlighted the recent discontent amongst European politicians and exporters over the impact of a strong Euro on demand from overseas.

Officials within the European Central Bank have been notoriously reserved when commenting on the impact from a strong currency on the broader economy, which suggests that the President, Jean-Claude Trichet, will address the Euro's movements in the accompanying press conference this Thursday. The task for the Central Bank will be to ascertain whether the risks to economic expansion is greater that current inflationary pressures.

Data Released 3rd October

UK 09:30 CIPS Services (September)

EU 09:00 Services PMI (September)

EU 10:00 Retail Sales (August)

U.S 13:15 ADP Employment (September)

U.S 15:00 ISM Non-Manufacturing (September)

written by Adam Solomon

The Pound came within a whisker of touching 2.0500 versus the Dollar yesterday before trading off at the close of trading last night while the UK currency also made modest gans against the Euro despite a host of weak economic data.

Consumer credit and a separate report on UK mortgage approvals were both down on expectations while growth in the manufacturing sector slowed in September. Like the Euro-zone, companies in the UK are struggling with the recent strength of the Pound, which will inevitably cool demand from overseas and weigh on export growth.

The relative positive sentiment surrounding the Pound can also be attributed to a sense of stability returning to financial markets as investor's appetite for risk improves, giving them confidence to buy higher-yielding currencies funded by loans in Japan.

The Bank of England's 5.75% interest rate is the highest amongst all of the Group of Seven nations, making the Pound an attractive commodity for investors looking for higher returns.

However, the recent spate of negative economic reports may fuel speculation that the MPC could spring a surprise on Thursday and cut UK interest rates to provide some relief to the banking system.

A report yesterday from Hometrack Ltd showed that UK house prices were unchanged for a second consecutive month in September, which suggests that five interest rate hikes in the past year and have finally slowed the market.

The Euro vigourously tested the 1.4250 level against the Pound last week but the single currency has traded well above that level over the past trading session as weakening economic data will surely force the ECB to change it's monetary policy stance this Thursday.

The chairman of the Central Bank, Jean-Claude Trichet, has so far failed to acknowledge the impact of a strong Euro on the broader economy and in a speech at the weekend he elected to focus on the 'good work' of the Bank in containing the credit crisis.

However, given the host of negative economic reports, Trichet will surely have little choice but to recognise the damage that the Euro is having on corporate profitability as a host of companies are set to report huge losses based on currency fluctuations.

In terms of economic data, growth in Euro-zone manufacturing remained virtually unchanged yesterday although the regional surveys showed that activity had slowed in both France and Germany.

The Euro may struggle to make further gains against the Pound this morning ahead of a report on European unemployment, which is forecast to stay unchanged at 6.9% in August while producer price inflation may moderate to 1.7% year-on-year over the same period.

The Dollar rose against both the Euro and the Pound yesterday, which coincided with a significant rally in the U.S stock market that suggests the turmoil surrounding financial markets is beginning to subside.

The Dow soared to a new all time high above 14,000 taking carry trades and other high yielding currencies up with it but the rally yesterday only masks the problems that the U.S economy still faces.

The marked improvements in the regional manufacturing surveys in Chicago and Philadelphia were not reflected in the ISM report yesterday, which surprising showed that growth in the sector rose at the slowest pace in six months.

The factory index fell to a reading of 52.0 in September, suggesting that the economy is cooling despite stronger growth from overseas and weak Dollar spurring exports.

The drop in the prices paid component of the report indicates that inflationary pressures are moderating, which will give the Federal Reserve the scope to lower interest rates further at the end of this month.

The Dollar may struggle against the majors this afternoon as the sole piece of economic data may show that pending homes fell in August for the fifth time in six months.

Data Released 2nd October

EU 10:00 Producer Price Inflation (August)

EU 10:00 Unemployment (August)

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

written by Adam Solomon

Following on from last week, the U.S Dollar succumbed to a fresh record low against the Euro, breaching the 1.4200 level by the close of trading on Friday and also recording heavy losses versus the Pound amid a mixed bag of economic reports.

U.S consumer spending rose more than initial forecasts in August amid speculation that the fallout from a weakening labour market and the collapse in subprime lending has yet to impact the broader economy.

In addition, there was evidence of some improvement in the manufacturing sector as the Chicago PMI took a surprising swing to the upside with growth rising above a reading of 53.0 with a figure above 50 indicating expansion.

However, personal income growth slowed as spending increased while the PCE deflator, the Fed's preferred measure of inflation, moderated to a degree that suggests further monetary easing is likely.

Collectively, the data last week reinforces the view that the Fed will need to cut interest rates at the end of this month but nothing more than a quarter-point cut is likely since the rise in commodity prices and the fall in the Dollar will inevitably put upside pressure on inflation.

The Dollar came under intense pressure against both the Pound and the Euro and will be looking for some support this week as the focus switches to the monthly U.S employment report on Friday. Payroll growth has weakened over the past few months but recent evidence in weekly jobless claims shows that a rebound in nonfarm payrolls is likely in September.

The overwhelming strength of the Euro continues to show few signs of subsiding as the single currency approaches another record high versus the Dollar and has also risen to the highest level against the Pound since April 2006.

The European Central Bank has so far been reluctant to acknowledge the impact of the Euro's phenomenal rise on the wider economy but reports last week have shown softer inflation and weakening confidence.

German retail sales fell 1.4% in August despite the fact that unemployment in the region hit the lowest level in 14-years as confidence in the economy on the whole has deteriorated.

As I have mentioned, the ECB has so far failed to comment on the impact of the Euro but the EU's Junker stated last week that a strong currency was causing concern and it seems to be only a matter of time before the ECB makes a similar comment.

The Central Bank's reluctance to slow the Euro's rally may stem from the flash estimate on consumer prices for September, which surprising showed that inflation had risen above the 2.0% target for the first time in over a year.

A strong Euro would normally reduce inflationary pressures but considering the unprecedented rise in commodity prices, the ECB may be forced to retain a tightening bias in the monthly interest rate announcement this week.

The Pound traded near to the lowest level in nearly two and a half years against the Euro last week amid reports from the Financial Times that the UK mortgage lender, Northern Rock, had been forced to borrow a further £5 billion to stay in business.

The UK currency recorded the fourth weekly decline against the Euro, pushing it to its worst quarter performance on over four years amid speculation that the Bank of England will need to cut UK interest rates from 5.75%.

However, the Pound has continued to upward momentum against the U.S Dollar and came within a whisker of 2.0500 despite reports of weakening consumer confidence and the fallout from the news that Northern Rock sought further emergency funding from the Bank of England.

The focus this week will inevitably fall on the Bank of England interest rate announcement on Thursday with althe MPC expected hold rates unchanged. However, the Pound may struggle to make gains in the build-up to the announcement amid speculation that surprise rate cut could be on the cards given the problems with the UK banking sector.

Data Released 1st October

UK 09:30 Consumer Credit (August)

UK 09:30 CIPS Manufacturing Survey (September)

UK 09:30 Mortgage Applications (August)

EU 09:00 Manufacturing PMI

U.S 15:00 ISM Manufacturing (September)

written by Adam Solomon