Daily Insight

Following a poor start to 2007, the Dollar advanced yesterday and made significant gains against the majors, firming 0.8% versus the Euro and a surprising 1.1% against the Pound following a particularly positive report on U.S manufacturing. The ISM index rose to 51.4 in December from 49.5 the previous month and with a reading above 50 indicating growth, the report will ease concerns that the Federal Reserve plan to cut interest rates in the first quarter of the year. Elsewhere, the ADP employment report showed that U.S companies had unexpectedly shed 40,000 jobs last month, which is the first decline since April 2003 and may provide an insight into Nonfarm Payrolls later this week. Nevertheless, the Dollar stood firm and managed to make gains against Sterling overnight following the release of the minutes from the Federal Reserve's last policy meeting. Several policy makers including the chairman, Ben Bernanke, reiterated that inflation remains the biggest concern, which will reinforce speculation that the Fed plan to keep rates on hold at 5.25% over the coming months. The focus today in terms of economic data will fall on the release of the ISM non manufacturing survey, which may show that growth in the service sector remained strong in December.

The Euro continued to make gains against the Pound yesterday as a sharp fall in German unemployment led to increased speculation that the ECB would raise interest rates up to three-times this year. The Central Bank lifted rates to 3.5% in December and although the chairman, Jean-Claude Trichet, neglected to be drawn on the outlook for future monetary policy, he did conclude that the ECB will do 'whatever is necessary to ensure price stability.' There is a host of significant economic data released in the Euro-zone this morning with the Purchasing Manager's index on European services expected to show growth beyond a reading of 57.6 in December. While elsewhere, a separate report may show that unemployment in the 12 nations sharing the Euro-zone actually shrank in November while the flash estimate for consumer prices may show inflation has accelerated beyond 1.9% year-on-year in December.

After making steady gains against the majors over the Xmas period, the Pound came under intense pressure yesterday following a distinct lack of economic data released in the UK. However, Sterling may be granted a reprieve this morning following the release of the CIPS services survey, which may show that growth in the sector held near a three-year high in December. Elsewhere, a separate report may show that UK consumer confidence rebounded sharply in December, which will only reinforce suggestions that the Bank of England plan to lift interest rates next month. In addition, the Pound may receive a further boost from a report from the BoE on UK mortgage approvals, which may hold firm at 128,000.

Data Released 4th January

UK 09:30 CIPS Services Survey (December)
UK 09:30 Mortgage Approvals BoE (November)
UK 10:30 Gfk Consumer Confidence (December)

EU 09:00 PMI Services (December)
EU 10:00 Unemployment (November)
EU 10:00 Flash HICP (December)

U.S 13:30 Weekly Jobless Claims (w/e 30 December)
U.S 15:00 Pending Home Sales (November)
U.S 15:00 Factory Orders (November)
U.S 15:00 ISM (Non-Manufacturing) (December)

written by Adam Solomon