Daily Insight

The Pound came under renewed pressure yesterday and traded down against the Dollar and the Euro despite some positive UK data with the CIPS Services survey coming in slightly better than expected at 59.2 in May and the robust growth in the service sector is causing investors to speculate that the Bank of England will need to lift borrowing costs over the coming months. However, the BoE are widely expected to hold interest rates at 4.50% in June when they meet on Thursday this week as the MPC awaits a pick-up in consumer sentiment and further evidence of higher inflation. There is some significant data released this morning with the British Retail Consortium's sales survey for the month of May expected to show a modest improvement from April, despite an increase in household utility bills and higher unemployment.

The Euro has been steadily gaining against Sterling over the past couple of weeks, due in part to a string of poor UK data and it has to be said a plethora of positive euro-zone data, which has led to increased speculation that the ECB could raise their benchmark interest rates by half a point, which would be the biggest single increase in over 6-years. However, the market is now anticipating a bigger move in interest rates and if the ECB decide to take a more measured course of action when they convene on Thursday and only raise rates by 0.25% then the Euro may have a negative reaction in the market. There was some more positive economic data released yesterday in the euro-zone with the European service industries showing the strongest growth in five years, which has led to increased speculation that the ECB will outpace the Federal Reserve with regards raising interest rates and the Euro has already gained by 8.8% versus the Dollar this year alone.

The Dollar has declined dramatically since the monthly U.S job report last Friday, which showed that the economy added much fewer jobs than anticipated last month and as a result investors priced down the chances of June rate increase when the Federal Reserve announce their latest stance on interest rates later this month. There was some significant data released in the States yesterday with the ISM's index for non-manufacturing businesses dropping to 60.1 in May from 63.0 in April as consumer demand weakened and costs increased. Last night in Washington, Ben Bernanke, the chairman of the Federal Reserve, addressed an audience of banking executives and chose to use some aggressive language when talking about U.S inflation, saying it was "un-welcome" and the Fed would make sure it was "not sustained". This indicates that the Fed may not be ready to pause at 5% interest rates just yet.

Data Released 6th June

UK 00:01 BRC Retail Sales Survey (May)

written by Adam Solomon