Daily Insight

The positive sentiment surrounding the U.S Dollar continued yesterday amid a host of strong economic data that has rekindled interest speculation in the States as inflation shows signs of accelerating, which has historically prompted the Federal Reserve into action. Firstly, a report from the U.S labour department showed that nonfarm productivity rose 1.6% in the revised estimate for the second quarter, which was largely in line with expectations after rising 1.1% in the first quarter. As a result, unit labour costs have risen 4.9%, which was significantly higher than the consensus forecast and has fuelled speculation that the Fed have the capacity to keep raising interest rates as the American consumer has more disposable income, which should boost spending. The Dollar rose by a further 0.3% against the Euro and 0.7% versus the Pound as we closed towards 1.8800. However, it can be argued that the recent appetite for the Dollar may not be entirely justified as the incredibly strong economic data does not automatically guarantee a further rise in U.S rates to come and therefore, Dollar sellers may be well advised to take advantage of this unlikely rally. Elsewhere, the ISM's report on non-manufacturing was also surprisingly strong with the headline measure rising despite each of the nine components that make up the index falling.

The Euro also took advantage of the political tension in the UK by gaining a further 0.4% against Sterling despite an apparent lack of significant economic data in the region. However, a member of the ECB's governing council, Axel Weber, reiterated comments from the chairman last week, signalling that Euro-zone interest rates are to set to rise at least once more over the coming months with the benchmark rate expected to rise to 3.5% going into next year. Despite a worse than expected report on manufacturing and retail sales in the Euro-zone earlier this week, the Euro has continued to make gains against the Pound. There was some positive data released in Germany yesterday as factory orders rose by 1.8% in July, adding to speculation that the export market continues to look robust, which is likely to prompt the Central bank into action next month and lift interest rates in the face of rising inflationary pressures and accelerating economic growth. There is a distinct lack of fundamental data released in the region this morning with the focus falling on the ECB's monthly bulletin, which is widely expected to emphasise the sentiment for a further tightening interest rates next month.

The Pound has come under intense pressure this week thanks largely to the political tension surrounding Tony Blair's impending resignation although the data released has suggested the UK economy is in good shape with retail prices accelerating to the fastest pace in two years. However, the Pound made further losses against the major currencies yesterday as a report from the Nationwide Building Society suggested that consumer confidence had slumped in August in the face of rising unemployment and higher interest rates. There was some positive news for Sterling yesterday that failed to lend a boost to the ailing currency as the latest surveys on industrial production and manufacturing output continued to show signs of growth in July, which provides an indication that economic growth will continue to accelerate despite the BoE's surprise interest rate hike last month. The focus today will fall heavily on the Bank of England's September interest rate announcement with the market anticipating a 'no change' in policy this month and we will have to wait until the 20th of September to ascertain how the monetary policy committee voted. However, the national institute of economic and social research has released their latest index on UK Gross Domestic Product this morning, which shows that economic growth accelerated by 0.8% in the three months to August, adding to the case for higher interest rates.

Data Released 7th Sept

UK 12:00 BoE Rate Announcement

EU 09:00 ECB Monthly Bulletin

GER 11:00 Industrial Production (July)

U.S 13:30 Initial Jobless Claims (w/e 2nd Sept)
U.S 15:00 Wholesale Inventories (July)

written by Adam Solomon