Daily Insight

The Dollar continued to slide against the majors yesterday, dropping to a fresh 20-month low against the Euro and fell a further 1% versus the Pound to trade at the lowest point in 14-years following yet another band of poor economic reports. The Purchasing Manager's index into business activity in the Chicago region fell to a reading of 49.9 in November, which was significantly lower than expected and supports the view that economic growth will continue to moderate over the coming months. In addition, the core personal income and expenditure deflator, which is the Federal Reserve's preferred measure of U.S inflation, remained unchanged at 2.4% year-on-year in October as speculation continues to build that the Fed will begin cutting interest rates in the first quarter of 2007. Elsewhere, the Dollar continued to tumble as a separate report on the U.S labour market showed that the number of people out of work and claiming benefits unexpectedly rose last week to the highest in well over a year, which perhaps gives an insight into the Nonfarm Payrolls report next week. The Dollar may receive a much needed boost this afternoon as the ISM manufacturing report is widely expected to show a modest rise in activity in the sector during the month of November.

The Pound continued to rise against the Dollar yesterday, firming an additional 1.0% on the session to trade at the highest level since Sterling was dumped from the European Exchange Rate Mechanism in September 1992. The positive sentiment surrounding the Pound continued as UK house prices showed solid growth in November, which only supports the view that the Bank of England will be able to lift UK interest rates from the current 5.0%. The Pound also rallied up against the Euro, firming 0.3% to trade well above 1.4800 by the close last night despite a report on UK consumer confidence, which unexpectedly dropped in November.

The Euro made further gains against the Dollar yesterday and found support from a particularly strong report on Euro-zone economic growth as GDP, the value of all goods and services, rose 0.5% in the flash estimate for the third quarter following a significant increase in business activity and household spending. In addition, a separate report on European consumer prices showed that inflation had risen to 1.8% in November from 1.6% the previous month and it seems the ECB will need to continue raising Euro-zone interest rates in the face of faster economic growth and sustained inflationary pressures. The Euro rose 0.7% against the Dollar following the release of the data as speculation continues to build that policy makers will need to remain vigilant even after the projected rate hike next week. In terms of economic data, the focus this morning will fall on the Purchasing Manager's index into European manufacturing, which is expected to remain relatively unchanged in November.

Data Released 1st December

UK 09:30 CIPS Manufacturing Survey (November)

EU 09:00 PMI Manufacturing (November)
EU 10:00 Unemployment Rate (October)

U.S 15:00 Construction Spending (October)
U.S 15:00 ISM Manufacturing (November)

written by Adam Solomon