Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Sep 15 08 07:29 GMT |

Overview & economic commentary The minutes of the BoE September MPC meeting are the highlight of the UK event calendar this week. Market participants will be on the lookout for any changes in the discussions and ultimately the MPC vote that would signal a possible change in the balance of risks that interest rates could be cut once CPI inflation peaks. The testimony to the Treasury Select Committee last week gave no indication that the MPC voted differently this month compared to July and August when there was a 3-way split, but we think Besley could drop his call for a rate hike. UK CPI inflation data for August are due on Wednesday and are forecast to show a rise to 4.9% from 4.4% in July. The threat of high inflation becoming entrenched - a possibility supporting our call for no change in base rate - was highlighted last week when the quarterly inflation survey from the BoE revealed that inflation expectations rose to 4.4% in Q3. UK unemployment figures will be published on Thursday and could fuel fears about the economy. The total claimant count has started to rise by an average of 20,000 since June and with various sectors under pressure from falling demand, we suspect that unemployment is likely to drift upwards over the coming months as companies cut costs. In the US, we expect the Fed to keep interest rates steady at 2.0% tomorrow. The troubled banking sector and the rise in unemployment rate above 6% in August could lead the Fed to issue a less hawkish statement and lead FOMC voter Fisher to drop his call for higher interest rates. Interest rates are also forecast to stay unchanged in Switzerland at 2.75% when the SNB meets on Thursday. Currency commentary Developments in the US banking sector came to a head this weekend and the threat of bank failures triggered a major clearout in stocks/commodities and has already led to a sharp fall in the dollar. The Fed rate decision and statement on Tuesday will probably be key to judge whether there is any chance of a shift in bias and whether futures markets are right to price in 30% odds of an interest rate cut by year-end. Sterling managed to recover some ground last week and is bid above 1.80 against the dollar this morning. UK CPI data and the MPC minutes may be pivotal later this week to where sterling goes from here. €/£ moved back to the middle of the trading range around 0.80 (£/$ above 1.77), but weak euro zone data will probably be required to prevent a run-up back towards the highs of around 0.81. A heavy sell-off in global stocks have propped up demand for the chf and the yen. With regard to the SNB, we wonder whether the 14% rise in $/chf since July may result in a more hawkish statement. Major data and events today Today US Empire manufacturing survey, capacity use, industrial production French current account ECB speakers: President Trichet (10:00), Tumpel-Gugerell Tuesday UK CPI, RPI, RPIX, official house prices (DCLG) US CPI, TICs, FOMC interest rate decision (no change at 2% expected) German CPI, ZEW survey EU-15 CPI Canada manufacturing shipments RBA publishes minutes of September monetary policy meeting Wednesday UK unemployment, average earnings, unit wage costs, CBI industrial trends survey US current account, housing starts, building permits EU-15 trade balance Japan interest rate decision (no change at 0.5% expected) Canada int’l secs transactions BoE publishes minutes of 3/4 September MPC meeting RBA Governor Stevens speaks Thursday UK retail sales, PSNCR, PSNB, money supply, M4 sterling lending US initial claims, Philadelphia Fed survey Canada wholesale sales BoJ publishes its monthly economic report BoE speaker: Dale SNB interest rate decision (no change at 2.75% expected) Friday German producer prices Japan leading index, coincident index ECB speaker: Stark Chart: Rise in US unemployment and a troubled banking sector have led futures markets to price in no change in interest rates until March-09 Lloyds TSB Bank http://www.lloydstsbfinancialmarkets.com Disclaimer: Any documentation, reports, correspondence or other material or information in whatever form be it electronic, textual or otherwise is based on sources believed to be reliable, however neither the Bank nor its directors, officers or employees warrant accuracy, completeness or otherwise, or accept responsibility for any error, omission or other inaccuracy, or for any consequences arising from any reliance upon such information. 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