Daily Insight

The recent decline of the Dollar continued on Friday as a government report showed that the U.S economy added fewer jobs than expected in April, which further increased speculation that the Federal Reserve will raise interest rates just twice more before pausing at 5.25%. Nonfarm Payrolls, a monthly figure released on Friday afternoon, showed that 138,000 jobs were added last month against the revised 200,000 in March, the lowest since October last year with unemployment remaining steady at 4.7%. As a result, the Dollar dropped to new yearly highs against the majors, closing around 1.8700 against Sterling and above 1.2700 against the Euro. In recent weeks, the Fed chairman, Ben Bernanke has given the clearest indication yet that the current rate cycle of 15-consecutive rises in little under 2 years is coming to an end but when the Federal Reserve meet this Wednesday it is widely anticipated that interest rates will be lifted another quarter-point to 5.00%.

Sterling has enjoyed a decent rally over the past two weeks as evidence begins to build that UK manufacturing is starting to see some improvement and with Industrial Production, released on Wednesday, expected to show a sharp rise from the 1.5% decline in February, speculation will intensify that the next move for the Bank of England will be a rise in interest rates from the current 4.50%. With the BoE's inflation report also released on Wednesday, expected to be more upbeat in terms of growth in March and coupled with higher oil prices, the Bank of England will need to raise rates in order to keep inflation in check. There is some significant data released this morning in the UK with the Producer Price Index expected to show a modest rise in April from 0.3% in March.

As the Euro-zone economy continues to strengthen into the second quarter of 2006, the Euro has made significant gains in recent weeks, amid speculation that the ECB will need to lift interest rates in the coming months from the current 2.50%. Jean-Claude Trichet, the chairman of the central bank gave a press conference last week following the rate announcement, which as widely anticipated left interest rates unchanged this month. However, Trichet gave the clearest indication yet that interest rates will rise next month as the year-on-year growth rate accelerates from 1.8% to 2%.

Data Released 8th May

UK 09:30 Producer Price Index (April)

GER 11:00 Factory Orders (March)

written by Adam Solomon