Daily Insight

The Euro came under increased pressure yesterday, dropping by a further 0.3% against the Dollar and 0.2% versus the Pound as the ECB elected to hold interest rates at 3.0% for September despite economic growth accelerating to a six-year high earlier this month. After four rate hikes this year, the Central Bank decided to keep rates unchanged, which was widely expected and in the accompanying press conference, the chairman, Jean-Claude Trichet signalled that a further tightening of monetary policy was likely in October. In his statement, Trichet reiterated that "strong vigilance" would be needed over the coming months and historically, this terminology has been used as a trigger by the ECB to inform the market of an impending rate hike the following month. However, after an initial knee-jerk reaction the Euro resumed it's downward trend, closing well above 1.4800 against the Pound.

There was also some significant economic data released yesterday that failed to boost the single currency with German Retail Sales dropping by more than expected in July following the conclusion of the World Cup in the region and record temperatures that kept consumers off the high-street. Sales fell 1.5% against expectations of a drop around 0.4%. In addition, confidence in the European economy also declined by more than anticipated in the month of August after rising to the highest level since 2001 in July. It seems apparent that rising oil prices and higher interest rates may weigh heavily on economic expansion this year as the sentiment index fell to reading of 106.7, the first decline in 9-months. Finally, the Flash estimate Consumer Price Index came in largely in line with expectations at an annual rate of 2.3%, which was still above the ECB's 2.0% target and may prompt the Central Bank to continue raising interest rates a further 50 basis points this year.

The positive sentiment surrounding the Pound continued yesterday as UK house price inflation accelerated at the fastest pace in a year in August according to the Nationwide Building Society with the average cost of a UK home rising by 0.8%, which was well above expectations while the annual rate increased to 6.6%, the biggest rise since April 2005. Following the dramatic rise in UK mortgage approvals earlier this week, the seemingly buoyant housing market will give the Bank of England scope to raise UK interest rates once more this year from the current 4.75%. Elsewhere, UK consumer confidence dropped sharply in August to a reading of -8 against expectations of a more modest fall towards -5, which is slightly surprising considering the robust growth in retail sales in the last month. Although, higher petrol prices and rising mortgage rates may discourage consumers from returning to the high-street. There is some significant data released in the UK this morning with the CIPS Manufacturing Survey likely to stay relatively unchanged in August and may increase by a modest 0.1 as UK manufacturing continues to show signs of growth with output rising to the highest level since 2004 earlier this year.

The Dollar remained relatively unchanged at the close of trading last night despite a softer than expected report on U.S personal income and expenditure. Consumer Spending in the States rose by the most since January last month, rising by 0.8%, which was largely in line with expectations although the Fed's preferred gauge of U.S inflation posted the smallest gains this year. The modest rise of 0.1% reiterates comment from the Federal Reserve that the economy has peaked this year with economic growth moderating in the face of significantly higher interest rates. The report will add fuel to speculation that the Fed won't raise rates again this year but the Dollar looked unfazed and made unlikely gains against the Euro as a sharp fall in oil prices will undoubtedly improve the ever-widening U.S current account deficit. In addition, the Dollar received an unexpected boost as manufacturing in the Chicago area declined by less than anticipated in August while elsewhere, factory goods orders came out as expected with orders excluding transportation at 1.1% in July. The focus today in terms of economic data will be the monthly U.S job report this afternoon with investors anticipating that the economy added 125,000 jobs in August. If the Nonfarm Payrolls report comes in under expectations, we can expect the Dollar to come under further pressure against the Pound.

Data Released 1st September

UK 09:30 CIPS Manufacturing Survey (August)

EU 09:00 PMI Manufacturing (August)
EU 10:00 Unemployment Rate (July)

U.S 13:30 Non Farm Payrolls (August)

- Unemployment / Average Hourly Earnings

U.S 14:45 Michigan Sentiment (August Final)
U.S 15:00 ISM Manufacturing (August)
U.S 15:00 Construction Spending (July)

written by Adam Solomon