YB Currency Update – Friday 9th October

YB Currency Update – Friday 9th October

Equity markets are poised to open softer today, after a week that has so far seen the FTSE 100 index gain 3.3%. The US equity market closed higher overnight, buoyed by the better than expected results from Alcoa and the first year-on-year increase in US Chain Store Sales since mid 2008.

The US dollar strengthened overnight on remarks from Fed Chairmen Bernanke at a conference that ‘..as economic recovery takes hold, we will need to tighten monetary policy..’. Euro-dollar fell to a low of $1.4683, with cable rising above $1.60.

As expected, the Monetary Policy Committee (MPC) of the Bank of England left Bank Rate on hold yesterday, at 0.5%, and continued towards it target of £175 billion of asset purchases. The statement gave no clues to the further direction of policy and we will have to wait for the November Inflation Report meeting for more clarity. A key data release between now and then will be the first release of Q3 GDP on October 23rd. Today’s UK calendar won’t help the Committee a great deal.

Producer price data for September are expected to show some easing in the rate of annual deflation in input prices, mainly reflecting base effects. Output price inflation is also expected to be less negative in annual terms, though it remains extremely weak. Alongside producer prices, the UK trade balance is expected to show a narrowing in the deficit. Sterling’s fall over the last few years has had some success in breaking the trend deterioration in the trade deficit and this is expected to continue in the August data.

In the US this afternoon the trade balance is expected to remain broadly flat in August. Similarly to the UK, the dollar’s decline has been one of the reasons for a US deficit that is now running at its smallest levels for around eight years.

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