Daily Insight

The Euro made further losses against the Pound yesterday as unemployment in the Euro-zone rose for the first time since November 2003 as concerns of a slowing economy means companies are reluctant to continue hiring. The jobless rate increased to 7.9% in August, marginally higher from 7.8% the previous month and as a result, the Euro fell a further 0.2% against Sterling to close above 1.4800 last night. Following a 20% drop in oil prices since mid-July it was perhaps no surprise to see Euro-zone inflation dropping below the Central Bank's 2.0% comfort zone and yesterday a report on producer prices also showed moderating inflationary pressures that may alter interest rate expectations in the twelve nations sharing the Euro. We fully expect the ECB to lift their benchmark interest rate tomorrow by a further quarter-point, particularly since the robust growth in the manufacturing sector continues to bolster economic growth, but the tone of the press conference may be slightly less vigilant on a further rate increase before the turn of the year. There is some significant economic data released in the Euro-zone this morning with the purchasing manager's report on the service sector and we expect the index to remain at an elevated level in September following a reading of 57.1 in August. Elsewhere, the Euro may receive a timely boost on the release of Euro-zone retail sales for the month of August and the consensus forecast is for a rise towards 0.7% from the previous month as consumers hit the high-street before the value-added tax increase in Germany takes effect at the start of 2007.

The Pound remained firm against the majors yesterday, increasing by 0.1% against the Dollar despite a fundamental lack of any significant data released in the UK but this morning a report from the Nationwide Building Society has shown that consumer confidence improved last month, despite the Bank of England's surprise decision to lift UK interest rates in August. However, confidence amongst the consumer still remains relatively low in the UK and higher borrowing costs combined with more expensive utility growth will only dampen sentiment over the coming months. Elsewhere, a separate report on the UK housing sector showed that prices rose for a third month in succession, which only emphasises previous reports that the sector has managed to absorb higher interest rates and will continue to show sings of growth. There is also some significant economic data released in the UK this morning with the CIPS services survey expected to mirror the report on manufacturing earlier this week and increase from a reading of 56.7 in August, which will only add to speculation that the Bank of England have the scope to raise UK interest rates to 5.0% before the turn of the year.

The Dollar declined against both the Euro and the Pound yesterday as the market anticipates a further tightening of monetary policy in other leading economies while the next likely move for the Federal Reserve will be cut in U.S interest rates early next year. The Dollar has been in rapid decline particularly since the report from the institute of supply and management on Monday, which showed that U.S manufacturing fell to the slowest pace in 16 months in September, emphasising concerns that economic growth will continue to slow in the fourth quarter. Therefore, the monthly job report on Friday will take on added significance and we can expect the Dollar to decline further if nonfarm payrolls comes in below market expectations. The focus today in terms of economic data will the ISM non manufacturing index and it is widely anticipated that the service sector expanded at a much slower pace last month, which correlates with a dramatic slowdown in the housing market and consumer spending. Elsewhere, U.S factory goods orders may also show a drop of roughly 0.2% for the month of August while the ADP employment report will provide an insight into the labour market ahead of the monthly job report on Friday.

Data Released 4th October

UK 09:30 CIPS Services Survey (September)

EU 10:00 PMI Services (September)
EU 10:00 Retail Sales (August)

U.S 13:15 ADP Employment Report (September)
U.S 15:00 ISM (Non Manufacturing) Index (September)
U.S 15:00 Factory Goods Orders (August)

written by Adam Solomon