Daily Insight

The Pound managed to make significant gains against the majors yesterday, firming an additional 0.1% versus the Euro and a further 0.7% against the Dollar despite a worse-than-expected report on UK manufacturing. The purchasing managers index dropped to a reading of 51.9 in December as both input and output prices rose at a reduced rate, which suggests that inflationary pressures have moderated over the past month. However, it seems increasingly likely that the Bank of England will continue to raise interest rates in the first quarter as investors anticipate strong growth in consumer spending over the Christmas period, which will contribute heavily to higher inflation.

The Euro also began the new year in a positive fashion, rising 0.6% against a fragile U.S Dollar and only fell modestly versus the Pound following a particularly soft report on Euro-zone manufacturing. The index fell to 56.5 in December from 56.6 the previous month and although a reading above 50 indicates growth, the Euro came under a modest amount of pressure as European exports fell for the second consecutive month. However, following a host of hawkish comments from a number of ECB policy makers including the chairman, Jean-Claude Trichet, it is still widely expected that the Central Bank will lift interest rates to 3.75% as early as next month. The Euro has received a boost this morning as German unemployment fell by the most since 1990 as the fastest economic in six years encouraged companies to step-up hiring. The revised jobless rate dropped to 9.8% in December from 10.1% the previous month and at present it seems that the economy will be able to supplement the introduction of the VAT increase at the start of 2007.

The Dollar began the year on the back foot, falling dramatically against the major currencies as Americans were given the day off in honour of former president Gerald Ford. Therefore, the data due for release yesterday will now influence trading today with the ISM manufacturing report taking centre stage and the release of the minutes from the last FOMC rate announcement. Elsewhere, the Dollar may come under further pressure as a separate report may show a sustained drop in construction spending for the month of November while the ADP employment report may provide an insight into the Nonfarm payroll figure later this week.

Data Released 3rd January

GER 08:55 Unemployment (December)

U.S 13:30 ADP Employment Report (December)

U.S 15:00 ISM Manufacturing (December)

U.S 15:00 Construction Spending (November)

U.S 19:00 FOMC Minutes 12 December Meeting

written by Adam Solomon