Daily Insight

The Dollar managed to hold firm against the majors yesterday and even made some unlikely gains against the Pound following a survey released by the Institute of Supply and Management on the U.S service sector. Growth in service industries unexpectedly accelerated in the last month with the non-manufacturing index climbing to a reading of 58.9 from 57.1 in October, which will ease concerns that the downturn in industrial output and the dramatic slump in housing will halt economic expansion. Elsewhere, a separate report from the U.S labour department showed that growth in wages came in less than forecast in the third quarter, which limits the potential source of inflation. Non-Farm productivity expanded at the slowest pace in over a year in the revised estimate for the last quarter, rising just 0.2% while labour costs were revised down by more than anticipated. However, following the surprising growth in the service sector, which accounts for 90% of the economy, the Dollar may continue to hold firm against the majors until the monthly U.S job report released this Friday.

The Euro held firm against the Pound yesterday but surprisingly eased 0.1% versus the Dollar despite an unexpectedly positive report on European service industries. Growth in the sector, which represents the biggest part of the economy, accelerated beyond expectations in November and supports the view of the ECB that rising growth may spur inflation. In addition, with growth in manufacturing accelerating faster than expected and unemployment falling to the lowest level in more than five years, the ECB are poised to raise interest rates for the sixth time. The Euro may find support this morning from a report on German manufacturing orders, which is widely expected to rise by 1.1% on the month in October.

The Pound edged lower against the majors yesterday following a worse-than-expected report from the British Retail Consortium, which showed that retail activity increased at the slowest pace in nine months in November. Following a significant rise in unemployment and higher interest rates, it seems that UK consumer spending may continue to slow in the fourth quarter as a record consumer debt continues to weigh on sentiment. The focus today will fall heavily on the Chancellor's pre-budget report where Gordon Brown is widely expected to raise his forecasts for UK economic growth to 2.6% this year, which gives the Bank of England the scope to raise interest rates beyond the current 5.0%. In terms of economic data, the Pound may receive a further boost from a report on industrial production, which is widely expected to increase by 0.1% with output rising a further 0.2% although anything less is likely to result in further sterling weakness.

Data Released 6th December

UK 09:30 Industrial Production
- Manufacturing Output

UK 12:00 Chancellor Brown Pre-budget Report

GER 11:00 Manufacturing Orders (October)

U.S 13:15 ADP Employment (November)

written by Adam Solomon