Daily Insight

Following on from last week, the Dollar came under a modest amount of pressure on Friday following the release of the monthly U.S job report, which showed that the economy added 111,000 workers to payrolls in January while the unemployment rate unexpectedly rose. The jobless rate increased to 4.6% and slower growth in the U.S labour market combined with moderating wage pressures lessens the risks to higher inflation, which in turn leads to speculation that the Federal Reserve can hold rates over the coming months. There is a fundamental lack of economic data released in the States this week with the focus falling on the ISM Services report, which is expected to show a modest improvement following the surprise downside move the previous month. Therefore, the Dollar may receive a timely boost this afternoon as the index is expected to rise to a reading of 57.0 from 56.7 in December. While elsewhere, the chairman of the Federal Reserve, Ben Bernanke, is scheduled to speak at a conference this afternoon and his comments will be watched closely for any further insights into monetary policy.

The Euro declined heavily against the Pound towards the end of last week as the Flash estimate for consumer prices showed that European inflation fell under expectations in January. The index was widely expected to rise above the 2.0% target last month but with oil prices holding firm below $60 a barrel, the risks to price stability remain low as inflation came out unchanged at 1.9%. The significance of the report is that the European Central Bank are unlikely to raise interest rates this week particularly after the dovish rhetoric from the chairman, Jean-Claude Trichet, in last month's policy meeting. The Euro may come under some pressure this morning following the Purchasing Manager's Index on the European Service sector, which is expected to decline to a reading of 56.2 in January from 57.2 in December, although a figure above 50 indicates expansion.

The Pound managed to advance against the majors last week despite the apparent lack of economic data released in the UK as the focus fell on a report from the Bank of England, which showed a modest drop in mortgage approvals. However, the focus this week will inevitably fall on the Bank of England's interest rate announcement this Thursday. Although we expect the MPC to leaves on hold this month, there is the increased chance that policy makers may pull another surprise and hike rates a further quarter-point in order to bring inflation back under control. In terms of economic data, the focus this week fall on the CIPS Services report this morning with growth in the sector currently running at a 10-year high and the survey is expected to remain at an elevated level in January. Growth in Services, which accounts for the largest proportion of economic growth, would of been one of the main factors in last month's surprise rate increase and therefore, the report will be watched closely for a further insight into monetary policy.

Data Released 5th February

UK 09:30 CIPS Services Survey (January)

EU 09:00 PMI Services (January)

U.S 15:00 ISM (Non-Manufacturing) Index (January)

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written by Adam Solomon