Daily Insight

The Euro made significant gains against the majors yesterday, firming a further 0.2% against the Dollar and the Pound on the release of some better than expected inflation data, which only adds to speculation that the ECB will lift interest rates a further 50 basis points before the turn of the year. The Producer Price Index increased by 0.6% in July, which was slightly ahead of expectations, while the annual rate rose to 3.4%, a 10-year high, from 3.0% the previous month as significantly higher energy prices increased producer costs. There is some important economic data released this morning in the Euro-zone with the Purchasing Manager's Index for European services widely expected to drop slightly in August to a reading of 57.6 with a figure above 50 indicating robust growth in the sector. In addition, Euro-zone retail sales should provide an insight in terms of private consumption as sales in Germany decreased significantly in July thanks largely to the conclusion of the World Cup.

The Pound came under pressure yesterday despite a better than expected report on PMI Construction in the UK, which indicated robust growth in the sector last month while the data also indicated that the housing market continues to expand leading to a better overall performance for UK economic growth in the third quarter. Sterling has been gaining on speculation that the Bank of England will lift UK interest rates once more before the turn of year, particularly after Chancellor Brown raised his growth forecast and inflation expectations early last week. However, the Pound seemed unmoved by the positive data and remained relatively unchanged against the Dollar from Friday's close around 1.9050. There is some significant data released in the UK this morning with the CIPS Services Survey widely expected to decline to a reading of 57.6 in August. In addition, the Pound may come under further pressure this morning from the BRC retail sales survey with forecasters anticipating a drop towards 2.4% year-on-year in August, which will provide an insight into the domestic economy.

The Dollar remained relatively unchanged yesterday as the U.S celebrated Labour Day in the States and there is also a sparse supply of economic data released this afternoon but the Dollar is making some headway against Sterling this morning, dropping under 1.9000 for the second time in a week. However, any short-term Dollar gains will be limited as it looks increasingly likely that the Federal Reserve will continue to hold interest rates at 5.25% for the remainder of this year as economic growth continues to moderate while inflation has also showed signs of slowing. Therefore, the data released will take on added significance with the focus falling on the ISM non manufacturing index tomorrow along with the publication of the Fed's beige book, while provides an insight into the next FOMC announcement on the 20th September.

Data Released 5th September

UK 09:30 CIPS Services Survey (August)
UK 11:00 BRC Retail Sales Survey (August)

EU 09:00 PMI Services (August)
EU 10:00 Retail Sales (July)

written by Adam Solomon