Market Report

The pound was poised to snap two weeks of gains against the euro on speculation the Bank of England will cut interest rates within six months to support economic growth.

The U.K. currency is also headed lower versus the dollar as traders increased wagers on a rate reduction in the first quarter of next year amid signs Europe's second-largest economy is slowing. The government this week lowered its forecast for the pace of economic expansion in 2008 and a report showed house prices dropped the most in two years last month.

Retail sales in the U.S. probably increased at a slower pace in September as the housing recession eroded consumer confidence, economists said before a government report today. Falling home purchases and lower property values prompted Americans to spend less on furniture, appliances and building materials. Retailers from Wal-Mart Stores Inc. to Nordstrom Inc. posted weaker-than-forecast sales to end the quarter, raising concern the restraint would carry over to the holidays.

European Central Bank governing council member Axel Weber said the bank may need to raise interest rates to a level that restricts economic growth to keep inflation under control. The ECB stepped back from plans to raise rates in September, saying it wanted to assess the economic impact of rising credit costs and financial-market turbulence caused by the U.S. housing slump. Signs of discord are starting to emerge among ECB policy makers on the best way forward, with Weber the strongest advocate for another rate increase.

VC

SWINGS AND ROUNDABOUTS

Sterling yesterday made small inroads into the Dollar, as expectations grew that the Bank of England may not cut interest rates in the near term given lingering inflationary pressures. In contrast, recent comments by Federal Reserve officials suggested there was still room for it to ease its monetary policy to contain the impact of a U.S. housing downturn.

On Tuesday, Bank of England Governor Mervyn King gave no indication the bank will have to cut rates to ease an economic slowdown or help the business sector cope with the ongoing credit crunch. He said while tighter lending conditions could result in a further credit squeeze, he still believed Britain's economy needed to slow over the coming year to keep inflation risks at bay.

The Chancellor of the Exchequer Alistair Darling echoed King's concerns about inflation. In a Reuter's interview yesterday, Darling said monetary authorities should be ever vigilant about the inflationary threat in Britain.

The Euro gained across the board on yesterday in the wake of stronger-than-expected French and Italian production data, which suggested Euro zone manufacturers, are able to adjust to the currency's high exchange rate against the Dollar.

Then this morning we have had a change in fortunes for GBP. The release of the housing market Survey from The Royal Institute of Chartered Surveyors have reported that house prices fell at their fastest pace in two years in the three months to September. RICS said higher interest rates from tighter monetary policy, a tightening in lending criteria and the introduction of Home Information Packs were all dampening market activity. This data has affected the Sterling and it has deprecated across the board this morning and will re-ignite talk of a UK interest rate cut from the Bank of England.

Looking ahead to this afternoon, this week's data calendar in the US springs to life with the release of the August trade report and September import prices, in addition to the usual weekly jobless claims figures.

DH

Sterling retreated from an earlier three-week high versus the euro and fell against the dollar on Tuesday, weighed down by mediocre UK trade data and prospects for UK interest rate cuts in coming months. We have the Bank of England minutes from October's monetary policy meeting next Wednesday. Any signs of a potential interest rate cut could cause some serious damage to the value of sterling.

Federal Reserve policy makers signalled they are in no hurry to reduce interest rates again because they aren't convinced the U.S. economic expansion is coming to an end. Economic reports since then have justified their caution: manufacturing and services industries continued to expand last month, while employment did pick up.

LR

Firstly, i have to congratulate the England Rugby team for their deserved win over the Australians on Saturday. Lets hope England can go on and repeat their success of four years ago!

Friday saw good figures for the US with the Non farm payroll showing that 100k jobs were created in September. More importantly they revised the figures for July and August both upwards by a combined 118K.

The highlights of data in the UK this week are the PPI figures being released at 9:30 today. For the US we have the minutes of the FOMC meeting tomorrow, retail sales figures, PPI and University of Michigan confidence all on Friday.

Have a good week, and come on England!!

DE

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