Daily Insight

The Pound slumped against the majors yesterday, slipping 0.7% against the Dollar and a further 0.2% versus the Euro following a mixed bag of UK economic data that put Sterling under pressure in early trading. Firstly, the CIPS services survey dropped to a reading of 56.7 in August, which was significantly lower than expected and the fourth consecutive drop in the index since May, possibly signalling a slowdown in the sector. The robust growth in services this year would of been instrumental in the Bank of England's decision to lift UK interest rates last month and with input and output prices rising sharply, the BoE are likely to lift rates once more before the turn of the year with the next scheduled announcement this Thursday. In addition, the British Retail Consortium published its monthly report on same store sales yesterday with the survey showing a significant drop in retail activity in August with sales dropping to 2.5% year-on-year, which was largely in line with expectations following the robust growth in sales in July.

This coincides with a report from the Nationwide building society, which has only added to the negative sentiment surround the Pound as UK consumer confidence declined in August following the BoE's decision to lift interest rates in August as high unemployment and rising mortgage rates hampers consumer spending. Therefore, it now looks increasingly likely that Euro buyers would be well advised to take advantage of the current rate while we remain above 1.4700. The focus this morning in terms of economic data will be UK industrial production for July, which is widely expected to increase by 0.2% from the previous while manufacturing output may also post a moderate increase.

The Euro made significant gains against Sterling yesterday despite a damning report on European service industries, which represents the biggest part of the economy, expanded at the slowest pace in Seven months in August following a rise in Euro-zone interest rates. The purchasing managers index on the twelve nations sharing the Euro fell to a reading of 57.1 last month, which was lower than expected after accelerating to the fastest pace since 2000 earlier this year. Since then, manufacturing output, business and consumer confidence has begun to decline after the ECB suggested that a further tightening of interest rates was likely before the end of the year as the Central bank attempts to contain inflation. However, despite the report the Euro rallied against the Pound to close at the lowest level in nearly a month and with the ECB monthly bulletin likely to reiterate the bullish comments from the ECB last week, we can expect the Euro to make further gains in the build-up to the next monetary policy announcement next month. In addition, the single currency may receive a further boost today as manufacturing orders in Germany is widely expected to increase by 0.8% in July.

The Dollar has made gains against both the Euro and the Pound in the last 24hrs, dropping by nearly a point against the Dollar towards 1.8900 and a further 0.5% versus the Euro despite an apparent lack of any significant data in the early part of the week. There is some significant economic data released in the States this afternoon with Nonfarm productivity expected to increase to 1.5% in the revised estimate for the second quarter while unit labour costs may decline to an annual rate of 3.8% from 4.2% in the first. In addition, the focus this week in terms of fundamental data will also be released this afternoon with the ISM's non-manufacturing index widely expected to post a modest increase in August with a reading of 55.0 anticipated from 54.8 in July. The market is currently anticipating that the Federal Reserve will hold interest rates at 5.25% for the remainder of this year and therefore, the Fed's Beige Book will take on added significance this evening as we look for further evidence that the U.S economy is slowing while inflationary pressures have moderated going into the fourth quarter.

Data Released 6th Sept

UK 09:30 Industrial Production (July)
- Manufacturing Output

GER 11:00 Manufacturing Orders (July)

U.S 13:30 Nonfarm Productivity (Q2 Revised)
- Unit Labour Costs

U.S 15:00 ISM Non-manufacturing (August)
U.S 19:00 Fed Beige Book Published

written by Adam Solomon