Daily Insight

Following the release of the latest FOMC minutes last week, the dollar advanced against the majors with speculation building that the Fed will need to lift borrowing costs for a 17th straight month in June in order to keep inflation in check. However, on Friday the Dollar dropped to a three week low against the Euro and made significant losses against Sterling as the monthly U.S job report showed that the economy added much fewer jobs than expected in May and as a result the market is now pricing in only a 50:50 chance of a rate hike this month. The focal point of this week in terms of U.S data released will be the Trade Balance on Friday and it is widely anticipated that the deficit widened to $65 Billion in May, primarily due to higher import prices and rising energy costs. With a number of inflationary pressures weighing on Dollar sentiment, we can expect further market volatility today with the ISM non manufacturing index released this afternoon and it should provide some direction on growth in the service sector with forecasters predicting a decline to 60.1 in May from 63.0 the previous month.

In the past couple of weeks, the Pound has been hampered by a series of poor economic data that has calmed speculation that the Bank of England will need to lift interest rates in the coming months and therefore, the BoE are widely expected to hold rates at 4.50% in the announcement this Thursday. There is some significant data released in the UK over the course of this week with Industrial Production and the BRC Retail Sales survey tomorrow but today the focus will be on the CIPS services survey, which is expected remain strong at 59.0 in May.

Without doubt the most significant event this week will be the ECB interest rate announcement on Thursday with the market pricing in a probable quarter-point increase to take their benchmark rate to 2.75% following a dramatic increase in euro-zone industrial output and rising inflationary pressures. However, the choice of language used by some policy makers in the build-up to the announcement has left some investors speculating about a more aggressive move, seeing a rise of 0.50%, which would be the first time in over six years. We will be watching the accompanying press conference where Trichet may indicate that a future change in monetary policy is scheduled over the coming months and on this news we can expect the Euro to strengthen significantly against Sterling and the beleaguered U.S Dollar with 1.3000 a real possibility. There is some significant euro-zone data released this morning with services PMI's expected to remain at an elevated level and retail sales, which has been disappointing in recent months, is released tomorrow and is widely anticipated to show robust signs of growth in April.

Data Released 5th June

EU 09:00 PMI Services (May)

UK 09:30 CIPS Services Survey (May)

U.S 15:00 ISM (Non-Mfg) Index (May)

written by Adam Solomon