Daily Insight

The Euro unexpectedly fell against the majors by the close of trading last night despite the European Central Bank's decision to raise interest rates for the seventh time in the current tightening cycle following the fastest economic expansion since 2000. However, it was widely anticipated that policy makers would hike rates a further quarter-point with the benchmark lending rate currently standing at 3.75%. However, the Euro failed to consolidate on the recent gains made against Sterling following a shift in the tone and language used in the accompanying press conference. In February, Trichet gave a strong indication that interest rates were set to rise the following month, saying that "strong vigilance" would be required in order to maintain risks to price stability. However, in the statement yesterday the chairman seemed to adopt a less hawkish stance, which has since diminished the prospect of a back-to-back rate increase in April, declaring that "upside risks to price stability remain in the medium term." The press conference also highlighted the underlying feeling within the Central Bank that current rates are still at an "accommodative" level and that will surely prompt policy makers to continue monetary tightening over the coming months. It can also be argued that the description of the current benchmark lending rate as "moderate" as apposed to "low" has fuelled speculation that the ECB will only raise rates once more this year.

The Dollar managed to make modest gains against the Pound yesterday and rose 0.4% versus the Euro despite a distinct lack of economic data released in the States as we build up to the Nonfarm payroll numbers this afternoon. The recent positive movement from the Dollar provides some insight that the market is not paying too much attention to the disappointing ADP employment report earlier in the week. However, following a significant monthly rise in the number of jobless claims through February, it is widely expected that the U.S economy added fewer workers to payrolls over the past month. The labour market is showing signs of cooling and yesterday the weekly jobless figures showed that the number of people out of work and claiming benefits actually fell by 10,000 to an annual rate of 328,000, which is significantly higher than the 2006 average. The Dollar may come under some considerable pressure this afternoon if job growth proves to be at the weakest level in two years in February with the economy struggling to overcome weakness in the housing and manufacturing sectors. The consensus is for a projected 95,000 increase in payrolls from a 111,000 gain in January while the unemployment rate is expected to stay unchanged at 4.6%.

The Pound managed to firm up an additional 0.2% against the Euro by the close of trading last night despite the Bank of England's decision to keep interest rates unchanged this month as the MPC continues to assess the impact of three previous rate hikes since August. The nine-strong committee led by the governor, Mervyn King, elected to hold rates at 5.25% but has indicated over the past month that one more quarter-point increase would be necessary in order to bring inflation back towards the 2.0% target by the second half of the year. Following a substantial drop in retail sales over the past month combined with a slowdown in service sector growth, it seems that higher interest rates are having a negative impact on consumer sentiment. However, it can also be argued that higher borrowing costs have yet to cool the UK housing market, which has continued to show signs of growth over the past month with prices gaining 1.8% from January. The Pound may receive a timely boost this morning following a report on UK industrial production, which is expected to show modest growth in January while manufacturing output may stay unchanged with the annual growth rate at 2.3%.

Data Released 9th March

UK 09:30 Industrial Production (January)

- Manufacturing Output

U.S 13:30 Trade Balance (January)

U.S 13:30 NonFarm Payrolls (February)

- Unemployment
- Average Hourly Earnings

U.S 15:00 Wholesale Inventories (January)

written by Adam Solomon