The Dollar came under increased pressure against the Pound yesterday amid some particularly soft U.S data, which may have a bearing on tonight’s FOMC rate announcement. Producer Price Inflation rose by less than anticipated in August with prices excluding food and energy falling to a three-year low, which only reiterates comments from the Fed chairman, Ben Bernanke, that U.S inflation will continue to moderate in the fourth quarter. The index showed that prices paid to U.S producers rose 0.1% on the month although the core rate fell 0.4% year-on-year in August, which is the first back-to-back monthly decline since the back end of 2002. Therefore, with seemingly moderating inflationary pressures at the consumer level aswell, it seems evermore likely that the Fed will hold U.S interest rates 5.25% for the second consecutive month. The Dollar also lost ground on the release of some soft housing data yesterday, which showed that construction declined by more than expected in August, reaching the lowest level in three years. The 6% drop in housing starts to an annual rate of 1.665 million last month means that builders started work on the lowest number of new homes since 2003 and a sharp drop in consumer demand will leave a record number of unsold homes swelling the market. Without any economic data released in the States today, the focus will fall heavily on the Federal Reserve interest rate announcement this evening and the consensus forecast is for a ‘no change’ in monetary policy this month, which is already 100% factored into the market and any comments suggesting a further rise in rates before the turn of the year will surely boost dollar sentiment.
There has been a distinct lack of fundamental data released in the UK this week but the Pound looks increasingly strong against the majors, firming an additional 0.3% against the Euro to close around 1.4850 last night. However, the focus this morning will fall on the release of the minutes from the Bank of England’s last policy meeting where the MPC elected to hold UK interest rates at 4.75% following a surprise hike in August. The minutes should provide an insight into how the 8-strong committee voted with a unanimous decision expected but the market will be looking for any indication of a further rise in rates before the end of the year with economists anticipating a likely rate hike towards November. In addition, there is a report this morning on public sector net cash requirement, which is the amount of money the government has to borrow in order to meet its expenditure.
The negative sentiment surrounding the Euro continued yesterday following a report on producer price inflation in Germany, which suggests that inflationary pressures may be moderating in Europe’s largest economy in the face of falling oil prices and higher interest rates. The Euro fell an additional 0.2% against the Dollar yesterday after German investor confidence dropped to the lowest level in over seven-years this month as rising interest rates and a planned tax increase next year hampered the outlook for growth in the region. The damaging report from the ZEW centre for economic research showed that the index dropped to minus 22.2 in September, which is the lowest level since January 1999. The German economy has grown at the fastest pace in six years in 2006 and the report yesterday provides further evidence that growth will begin to moderate next year.
Data Released 20th September
UK 09:30 BoE Minutes from September meeting
UK 09:30 PSNCR
U.S 19:15 FOMC Rate Announcement
written by Adam Solomon
Related posts:
- Higher interest rates are beginning to wane on U.S consumer sentiment with housing starts expected to decline further in May
- The Pound makes significant gains against the majors despite a slowdown in the UK housing market according to the Rightmove House Price indicator
- The Pound weakens against the Dollar as UK Producer Prices decline in June while the Housing market continues to show signs of growth
- The Euro makes gains against the majors as the Procuer Price inflation gauge increases to a 10-year high at an annual rate of 3.4%
- The Pound may slip following a two-month slowdown in the UK Housing Market
