Market News

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 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)

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.

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

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)

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 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)