Daily Insight

The Pound managed to rebound sharply against the Euro yesterday but fell for the second day in succession versus the dollar despite a host of positive economic reports. Firstly, the CIPS survey into the UK service sector rose to the highest level in nine years for the month of December, which suggests that the robust growth in services and the housing sector will continue to propel economic growth this year. Elsewhere, a separate report from the Bank of England showed that UK mortgage approvals increased to the highest level in three years in November, which will only prompt further speculation that the MPC will continue to lift UK interest rates beyond the current 5.0%. In recent reports, there seems to be an underlying resilience in the property market that the current lending rate is unable to slow to a degree that was anticipated. The BoE lifted rates to a five-year high in November but with house prices rising 10.5% over the course of 2006, it seems policy makers will have no choice but to continue monetary tightening.

The Euro came under increased pressure yesterday, falling 0.5% against the Dollar and the Pound following a surprisingly negative report on the European service sector, which unexpectedly slowed in December. The Purchasing Manager's Index showed that growth in service industries in the 12 nations sharing the Euro fell back to a reading of 57.2 from 57.6 the previous month. Although a reading above 50 indicates expansion, the report yesterday will fuel speculation that growth in the sector may have peaked. However, the Euro may receive a timely boost this morning following the release of the EC sentiment index, which is expected to show that confidence in the European economy rose to equal a six-year high. The index, which monitors business and consumer confidence in the Euro-zone, may provide an indication that the economy will continue to expand despite rising interest rates and the introduction of the German tax increase.

The very recent positive momentum surrounding the Dollar continued for a second day yesterday despite a mixed bag of economic data. Growth in the U.S service industries slowed by slightly less than expected in December but provided further evidence of a slowdown in the sector, which accounts for 90% of the U.S economy. The ISM non-manufacturing index fell to a reading of 57.1 from a six-year in November while a separate gauge indicated that factory orders rose 0.9% over the same period. Elsewhere, the Dollar continued to make gains despite a report on Pending Homes Sales, which provided an indication that the sustained weakness in the U.S housing market may extend into the new year. However, it can be argued that index, which unexpectedly dropped 0.5% in November, is pointing towards fairly stable housing market in the future. Without doubt, the focus today will fall heavily on the monthly U.S job report, which is expected to show that the economy added fewer jobs in December, which will cement the smallest employment gain since 2003. The Nonfarm payroll figure has become increasingly difficult to predict in recent months and although the unemployment rate is expected to remain unchanged at 4.5%, we can expect the market to fluctuate depending on the result.

Data Released 5th January

EU 10:00 EC Sentiment Index (December)
- Business Confidence
- Consumer Confidence

EU 10:00 Retail Sales (November)
EU 10:00 Producer Prices (November)

U.S 13:30 Nonfarm Payrolls
- Unemployment
- Average Hourly Earnings

written by Adam Solomon