Market Report

Yesterday, both The Bank of England (BOE) and the European Central Bank(ECB) acted as was predicted by most. The BOE left interest rates on hold, which leaves a strong possibility of a rate hike next month. The ECB hiked interest rates by 25bp to 3.25%, and in their press conference remained hawkish consistent with likely further rate hikes before the end of the year.

Sterling weakened against most major currencies yesterday afternoon after the announcements from the banks.

Today sees the release of UK industrial production data at 9:30, which is unlikely to affect the markets in the run up to the big data release of the week, the Non-farm payrolls from US at 13:30, which always excites the markets. Analysts are predicting non-farm payrolls to rise by 95K, and the unemployment rate to stay at 4.7%. A figure above the 120K would see the USD strengthen, in my mind that is where the risks lie for this afternoon.

Good luck to England on the weekend.

DE

The Bank of England will today make its decision on interest rates with it widely expected to keep them on hold for now at 4.75%, we believe that Sterling will start to come under some pressure. This was also the case in August when the Bank of England surprised most people by hiking the rate by a quarter of one percent pushing the pound to an 11 week high against the Dollar, so be prepared for some fireworks this afternoon one way or the other.

The European Central Bank also make their latest decision on interest rates today at 12.45pm, this we believe will be a hike of one quarter of one percent to 3.25% to keep inflation in check after economic growth in the Euro zone accelerated.

The Federal Reserve vice Chairman Donald Khon has warned that inflation in the U.S has not gone away and contrary to popular belief there may have to be a further hike in US rates.

VC

There was little in the way of economic data released yesterday, and the foreign exchange markets were quiet on the back of this.

Today should be a busier day as we see data released in the Euro zone, UK and the US. Service sector data released in the Euro zone is expected to show further decline today, but the index will remain at a high level. We also see the retail sales figures from the Euro zone which is expected to show retail spending increasing for the third month in a row.

Neither of these releases are likely to have much impact on the markets, as we wait for tomorrows ECB meeting and press conference which is likely to see Euro zone rates rise to 3.35%. The UK however are unlikely to raise rates tomorrow but GBP may remain bid into the run up as a reaction to the surprise August hike that caught the speculative market the wrong way round.

From the US today we also have service sector data, and the Fed's Bernanke talking on the subject of monetary policy. This should give us some clues on where US interest rates may move and offer a display of the level of concern over the mooted US economic slowdown.

The south African Rand has dropped to a 3 year low overnight as the price of gold and platinum declined and and other emerging market currencies weakened. The Australian Dollar was also at 11 week lows on the back of the drop in commodity prices.

It will be interesting to monitor the situation with Gas in the UK. Traders were paying people to take gas off of them yesterday. This has been 'fuelled' by the new pipeline of gas from Norway, and the milder weather leading to less demand. The gas companies are quick to raise prices for households, but how long will it take for the price cuts to get to households!

DE

The USD came under pressure yesterday, with sentiment remaining this morning, on speculation that this week's data will paint a less than rosy picture of US growth prospects. There is no data from the US today to add fuel to the fire however we will see the release of services ISM (Supplier sentiment) tomorrow and the much awaited payrolls on Friday. Though the picture for the US as slowed, the turn has not been as dramatic as the shift in sentiment and I continue to advocate the fact that the market is too focussed on the downside and even moderate data could see a relief rally in the USD.

GBP had a positive day yesterday as the weekend's hawkish press and positive data gave the market hope of a rate rise as soon as this week. While there is certainly a case for a rise in November on the back of a stubbornly high rate of inflation, I personally feel that 5% rates will be detrimental to the economy going forward. GBP though will retain its bid tone at least into Thursday's meeting where an unchanged MPC has potential to disappoint.

Further political concerns are likely to impact the HUF again today as concerns that the Hungarian Prime minister will fail to win the vote of no confidence on Friday, as a result the HUF is likely to stay weak until we get a definite outcome.

European stocks are retreating from close to a five year high on concerns that a global economic slowdown would erode profit growth. UK equities fell yesterday lead by the oil companies as oil continued to fall back from its highs. This concern over the global economy is likely spread to currencies if we continue in the same vane and the negative sentiment that is currently focussed on the USD, is likely to switch to the exporting nations like Germany and Japan. We could well see a pick up in FX volatility from here.

NS

The press was quite mixed for GBP over the weekend however this weeks MPC rate setting meeting and the possibility of a further hike was a clear moot point. Although it is very likely that the ECB raise rates by 25bps on Thursday, despite the fact that the Sunday Times shadow MPC voted to raise rates at this months meeting I personally feel that it is two early for the MPC. The overriding doubts about the US and indeed Euro zone's longevity of economic strength add too much doubt for a rate hike this week.

We also start the week with a little concern over the state of the U.S economy. Forecasters have cut their estimate for growth to a rate of 2 percent or less for the year, with home sales showing a significant fall this is likely to off set any benefit that would have materialised from the fall in the price of oil. The FED still maintains that there will not be a recession but we could still see the Dollar start to come under some pressure.

The Euro zone is also facing some concerns over its growth prospects with some currency analysts calling for the EUR to become lose some ground in the currency markets, against the USD in particular.

Despite a rise in the Bank of Japans quarterly Tankan survey of business sentiment to 2 year highs, the JPY dropped to a five month low on speculation that a stronger economy would give Japanese investors (Japan is the world's largest 'saver') more confidence to buy overseas assets.

Political concerns have returned with a vengeance this week after the currency gained significantly into the end of last week. The ruling Socialist party has suffered setbacks in the local elections prompting calls for the dismissal of the Prime Minister. Losses for the HUF above 400 vs. GBP look likely to extend from here.

VC

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