Daily Insight

The Euro has been steadily gaining over the majors in the past couple of weeks, particularly the Dollar, as the outlook for higher euro-zone interest rates begins to gather momentum. Three members of the ECB's governing council publicly put forward their recommendation for a more aggressive move towards monetary tightening and therefore, the June ECB rate announcement later this week will take on added significance. It is widely expected that the Central bank will hold interest rates at 2.75% but much stronger than expected economic data has cast doubts over this sentiment as the ECB attempts to cope with the threat of global inflation and faster economic growth. There is a string of significant data released this week with the PMI surveys for manufacturing and services released today and Wednesday. In the figures released this morning, euro-zone manufacturing expanded at the fastest pace in six years for the second consecutive in month in June, which provides further evidence of growth and a strengthening economy and therefore raising the prospect for higher interest rates.

The prospect for a rise in UK interest rates has been severely dented in recent weeks, particularly since the untimely death of MPC member David Walton who was the only member of the eight-strong committee recommending a rise in UK rates from the current 4.50%. The BoE reconvenes on Thursday this week to announce their latest stance on monetary policy and the MPC are widely expected to hold rates for the 11th month in succession as they await a sustained pick-up in consumer sentiment. However, pressure for tighter monetary policy is growing and there is some significant data released this week, which should provide an indication of the strength of the economy with the UK manufacturing survey set to show further improvement in new orders in May with output expected to show modest gains of 0.1%.

The Dollar has been struggling since the FOMC rate announcement last Thursday after the Federal Reserve elected to raise U.S interest rates by a quarter point for the seventeenth month in succession as they attempt to stem the threat of higher inflation. However, the Dollar retreated after the language used in the accompanying statement looked less aggressive on the prospect of further monetary tightening in August although the Fed stated that "some inflation risks remain". The Dollar traded back towards 1.8450 against the Pound over night as investors shortened their odds for a further hike in U.S interest rates in August. There is a host of important data released in the States this week, most notably the monthly job report on Friday with growth expected to remain fairly muted in June, heightening the case for a pause in U.S interest rates. Nonfarm payrolls are widely anticipated to show that the economy added 168,000 jobs in June, down from 180,000 in May although the unemployment rate is expected to remain unchanged at 4.6%. There is also some significant U.S data released this afternoon with the ISM manufacturing survey and forecasters are anticipating a further decline in June, with the index falling from 61.9 in February to 53.7 in May, primarily due to a strong dollar and higher energy costs.

Data Released 3rd June

UK 09:30 CIPS Manufacturing Survey (June)

EU 09:00 PMI Manufacturing (June)

U.S 15:00 Construction Spending (May)
U.S 15:00 ISM Manufacturing (June)
U.S 15:00 Domestic Auto Slaes (June)

written by Adam Solomon