Daily Insight

The Pound declined against the majors yesterday, falling 0.3% versus the Dollar and dropping modestly versus the Euro following a worse-than-expected report on the UK service sector. Growth in services, which accounts for the largest proportion of economic growth, moderated from a 10-year high in January after the BoE raised interest rates three times since August. The CIPS purchasing managers' survey came out at a reading of 59.2 after rising to 60.6 in December and the report will fuel speculation that growth in the sector may of peaked with interest rates currently running at a five-year high. Nevertheless, any Sterling losses were short-lived and overnight we have advanced against both the Euro and the Dollar following a report from the British Retail Consortium. The survey showed that UK retail sales increased at the fastest pace in six months in January, rising at an annual rate of 3.1% after gaining 2.5% in December. The report will only provide further evidence that consumers will be able to supplement higher interest rates and with inflation reaching the fastest pace in a decade, it seems increasingly likely that rates will continue to rise over the coming months.

The Dollar received an unexpected boost yesterday as growth in U.S service industries accelerated faster than anticipated in January with the headline measure reaching the highest level since May last year. The Institute of Supply and Management released their monthly index, which showed that growth in non-manufacturing companies rose to a reading of 59.0 in January with a figure above 50 indicating expansion. The U.S service sector accounts for the largest proportion of economic growth and combined with lower energy prices and higher wages it seems the U.S economy will continue to expand at a 'moderate' pace this year, predominantly fuelled by consumer spending.

The Euro found some support yesterday, firming 0.4% against the Dollar and remaining firm versus the Pound after a report showed that European service industries unexpectedly expanded in January after unemployment in the Euro-zone fell to the lowest level on record. The Purchasing Managers' Index rose to a reading of 57.9 from 57.2 in December and the report suggests that growth in the sector will continue to rebound from a slowdown at the start of the year. In addition, Services growth accelerated in Germany, Italy and France in January and a separate gauge of business expectations also jumped to a reading of 67.8 from 65.3 the previous month. Although, economic growth is expected to moderate in the second half of the year, the report yesterday will only fuel further speculation that European interest rates are set to rise in March. The Euro may make further gains against the majors this morning following a report on retail sales, which is widely expected to increase 1.0% in December while also rising to an annual rate of 2.3%, as consumers stepped up spending before the VAT increase at the start of the year.

Data Released 6th February

EU 10:00 Retail Sales

written by Adam Solomon