Daily Insight

The Euro advanced yesterday, firming 0.2% against both the Euro and the Dollar as the ECB kept Euro-zone interest rates on hold at 3.25% but clearly signalled a further tightening of monetary policy could be expected in December. In the accompanying press conference, the chairman of the Central Bank, Jean-Claude Trichet, used the specific language that we have come to associate with a trigger to the market that policy makers are scheduled to lift interest rates the following month. Trichet reiterated that "strong vigilance" was still required in order to rein in inflation to a level consistent with price stability. However, the Euro only managed to make modest gains against the majors and we can deduce that the hawkish rhetoric of the statement was widely anticipated by the market and investor's had factored in a good chance of a further quarter-point rate hike in December. In terms of economic data, the Euro received a further boost from a report on European manufacturing, which accelerated by more than expected last month and with economic growth accelerating at the fastest pace in 6-years combined with an increase in money supply to the Euro-zone, the ECB may continue raising rates into 2007. The Euro may come under some pressure this morning following a report on European retail sales for the month of September, which is widely anticipated to decline by 0.2% from August.

The Pound has been advancing all week against the majors on speculation the Bank of England will lift UK interest rate twice more by the middle of next year as inflation continues to remain above the government's 2.0% target. Sterling has risen to a 16-month high against the Euro this week and achieved a one-year high versus the Dollar at 1.9130 as we anticipate a probable rise in rates to 5.0% next week when the BoE monetary policy committee meets on the 9th November. Following a sparse supply of economic news yesterday, the Pound may receive a boost this morning with a report on the Purchasing Manager's index for UK manufacturing, which is expected to post a modest decline in October although a reading above 50 indicates expansion.

There is a host of significant economic data released this afternoon in the States with the focus falling heavily on the monthly U.S job report, which historically is increasingly difficult to predict and normally always moves the market. U.S nonfarm payrolls is expected to show robust growth in October with the economy adding twice as many jobs from the previous month at 120,000 while the unemployment rate may stay at five-year low at 4.6%. The Dollar may make real gains against the majors if the figure comes out in excess of expectations as growth in the labour market and rising incomes propels economic growth in the face of the biggest housing decline in 15-years. Elsewhere, a separate report from the Institute of Supply and Management may show that U.S service industries grew at a faster pace than expected in October with the index of non-manufacturing businesses rising to a reading of 54.5 last month.

Data Released 3rd November

UK 09:30 CIPS Services PMI (October)

EU 10:00 Retail Sales (September)

U.S 13:30 Nonfarm Payrolls (October)
U.S 13:30 Average Earnings (October)
U.S 13:30 Unemployment Rate (October)
U.S 13:30 ISM Non-Manufacturing (October)

written by Adam Solomon