Market Report

Yesterday's price action for the most part was quite orderly. The USD continued its weakening trend that has been prevalent all week and just as it seemed to be gaining a little support from the range extremes, the Philadelphia Fed index of business outlook (widely followed as an indicator of manufacturing sector trends) came in at -0.4 against an expected value of around +15.

The USD has accelerated its slide from the data release and GBPUSD and EURUSD are moving towards the years highs. This data has further tempered the expectation of another rate rise in the US yet sentiment is still very firmly focussed on rate hikes still to come from the UK and Europe on continued inflationary pressure. This is going to keep the USD on the back foot in the near term.

Outside of the majors the Polish Zloty fell for a second day as the ruling coalition split, leaving the cabinet without parliamentary majority and leaving the door open for early elections. Political uncertainty is never good for a currency.

As we move into the weekends Ryder Cup action, I for one hope that the USD weakness and EUR strength in currency markets is a reflection of the golf to come. Who knows, if Tiger Woods' 1st tee shot today is anything to go by then we stand a good chance!

Have a great weekend.

NS

The Dollar continued its slide yesterday with the FED keeping interest rates on hold at 5.25%, this coupled with expected reports suggesting a slowdown in manufacturing, and a rise in the jobless claims seems to indicate there is more room for the Dollar to decline further in the short term.

Asian currencies rose after initial fears that investors would sell assets in the region due to the recent turmoil in Thailand proved to be unfounded. The Yen also found some strength after Japans trade balance widened for the first time in three months.

Sterling reached a ten month high against the Euro this morning on the back of an expected hike in the interest rates in November. The UK mortgage figures released on Wednesday along with the Bank of England minutes showed that inflation is still a major concern in the UK.

Frequent readers of this page will be aware of our views on a further rate rise in the UK and the negative impact that a hike would have on the consumers ability to service debt and maintain spending. To this end the levels that we are seeing currently in GBPUSD and GBPEUR are very attractive to sellers of GBP. We wont be this high for too long!

VC

With nothing in the way of top tier data today the focus will be on the MPC minutes from the 7th September meeting, at which rates were kept on hold and the decision from the FOMC this evening on US rates.

In the light of the slightly softer consumer data, levelling off of inflationary pressures and rising concerns over the housing market in the US, the Federal Reserve are very unlikely to rise rates this evening, however as usual the statement will be closely scrutinised for any hints as to the future path of rates. More and more commentators are shifting to the opinion that the next move in US rates will be down.

In the UK the vote was likely to have been unanimous to leave rates unchanged and again the tone of the language will be closely scrutinised for signs of inflation concerns or growth doubts, and how they may pan out in terms of future rate moves. This expectation is likely to weigh on GBP today; there is still a lot of scope for GBP to weaken from here vs. both USD and EUR.

The political worries in Thailand impacted FX markets yesterday weakening the JPY briefly before it became clear that the military coup to oust PM Thaksin and form a new temporary government was a specifically localised event.

VC

There seems to be a dilemma brewing in the United States at the moment, the housing market is in the doldrums with fewer houses being built than in the last three years plus fewer mortgage applications due to higher mortgage rates, yet inflation still persists leaving the FED in an awkward situation. Do they raise interest rates again to quell inflation and boost the Dollar or leave rates as they are and risk the Dollar weakening?

Today we see the release of the housing starts and the Producer Price Index from the United States which will both be keenly watched to that end.

Sterling may gain against the dollar and the Euro as signs growth and inflation is picking up stoke speculation the Bank of England will raise interest rates again this year. The pound rose last week versus the dollar and hit a two- week high against the Euro as reports showed inflation quickened in August, property prices rose and sales at U.K. retailers rebounded in August. The U.K.'s biggest employers' group said yesterday the central bank will need to lift rates to combat inflation, the first time it has called for higher borrowing costs.

After some encouraging fiscal signs from the Hungarian government over the last couple of week's, street protests yesterday saw the Forint fall by the most in almost a month, highlighting the currency's fragility once more.

Have a good day

DH

After last weeks steady rise by Sterling there is little to suggest that there will be any change this week despite some underlying economic concerns. With no significant data release this week from the U.K all eyes (and ears) will be on the MPC minutes of the September meeting, whilst it is widely expected to have been a unanimous vote the tone of the language may prove to be a good indicator for the next interest rate move.

In Europe, ECB Executive board member Gonzalez-Paramo said today the central bank is 'strongly vigilant against an inflation risk on the upside', signalling further rate rises from the ECB to come. This should underpin the EUR on currency markets as we enter the week.

In the US, the Producer Price Index for August is expected to rise 0.2% when the figures are released on Tuesday. Housing sector activity has slowed over recent months which seems to point to no further hikes in the interest rates any time soon, subsequently the Dollar has suffered over the last week with no real sign of a change in its fortunes soon. The FOMC on Wednesday will be very significant in illustrating the FED view on the future path of US rates.

The G7 meeting this weekend made little change to the previous statement and hence provide little new impetus for the market as we start the week. The overall tone however is still pushing for Asian currency strength but specifically from China where the currency remains artificially weak.

Hungary may continue to show some improvement this week as the government remains committed to reining in spending in order to qualify for joining the Euro and scope for further interest rate rises remains.

VC

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