Daily Insight

The Euro managed to make modest gains against the Dollar yesterday and by the close of trading last night was virtually unchanged versus the Pound amid cautious trade ahead of the ECB interest rate announcement and press conference this afternoon. The single currency also managed to shrug off a worse-than-expected report on German manufacturing orders, which surprisingly fell in January following a decline in foreign demand. Orders dropped 1.0% from December as the introduction of the value-added tax increase continues to hamper consumer spending while export demand wanes following the Euros 9.0% appreciation against the Dollar in the last year alone. The Euro may continue to make gains against the majors today as we anticipate a further rise in European interest rates this afternoon after the chairman, Jean-Claude Trichet, indicated last month that "strong vigilance" would be needed to ensure risks to price stability do not materialize. Policy makers will therefore increase the benchmark lending rate for the seventh time since late 2005 and in the accompanying press conference, Trichet may signal another rate hike in April. However, should the tone and language of the statement shift to a less hawkish stance, the Euro may come under some pressure as the prospect of a back-to-back rate increase diminishes.

The Dollar continued to decline yesterday, falling 0.4% against the Euro and a further 0.5% versus the Pound after the ADP employment report showed that U.S companies added just 57,000 jobs in February, the fewest since July 2003. The figures correlate with a sustained slowdown in U.S economic expansion as companies reduce hiring following the downturns in the housing and manufacturing sectors. The report will provide an insight into Nonfarm Payrolls tomorrow, which is expected to come in under expectations following the rise in weekly jobless claims over the past month. However, despite the recent weakness in housing, manufacturing and investment, the U.S economy is still expected to rebound sharply over the next quarter with economic growth accelerating to 3.0% by year-end.

The Pound managed to hold firm yesterday following a distinct lack of economic data released in the UK as we build up to the Bank of England interest rate announcement at midday. It is widely anticipated that the monetary policy committee including the governor, Mervyn King, will hold interest rates at a 5-year high as policy makers continue to assess the impact of three previous rate increases since August last year. In the past month, the BoE's quarterly inflation report has indicated that the MPC will need to raise rates by a further quarter-point over the coming months in order to bring inflation back towards the 2.0% target. Following the significant rebound in retail sales over the past month, there is a slim chance that the Central Bank will move as early as today but with Service sector growth expanding at the slowest pace in five months in February, it is more likely that the BoE will keep rates on hold at 5.25%. However, following the surprise rise in rates in January, there is a distinct possibility that the BoE will act this month as growth in the housing market continues to gather momentum and wage growth poses an increased risk to inflation.

Data Released 8th March

GER 11:00 Industrial Production (January)

UK 12:00 Bank of England Interest rate announcement

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

U.S 13:30 Initial Jobless Claims (w/e 3rd March)

written by Adam Solomon