Daily Insight

The Pound came under increased pressure against the majors yesterday, dropping 0.7% versus the Dollar and falling to the lowest level this year against the Euro following a report on UK service sector growth. The CIPS survey showed that service industries expanded at the slowest pace in five months in February, which will only provide a further indication that UK interest rates may have peaked. The index from the Chartered Institute of Purchasing and Supply fell to a reading of 57.4 down from 59.2 in January. Although a reading above 50 indicates growth, the pace of expansion has seemingly slowed to a degree, which threatens the prospect of any further monetary tightening as three previous rate increases begin to cool the economy. Therefore, it now looks increasingly likely that the Bank of England will hold rates at 5.25% on Thursday as policy makers wait to gauge the impact of the highest lending rate in five-years. As a result, the Pound dropped against the Dollar to close near a 2-month low last night as growth in services slowed and retail sales fell to a three-year low over the same period. However, the Pound has managed to hold firm overnight following a report from the British Retail Consortium, which has shown a considerable rebound in retail sales in February. Growth in sales came in well above expectations, rising 3.3% year-on-year last month, which represents the biggest rise since the middle of 2006 and provides some evidence that higher interest rates have yet to dampen consumer spending.

The Dollar managed to shrug off another round of poor economic data to close last night 0.7% higher against the Euro and also rose to a near two month high versus the Pound. The Institute of Supply Management released their monthly index on U.S service sector growth, which unexpectedly expanded at a slower pace than previously anticipated, which suggests that the slowdown in economic growth may filter beyond housing and factory production. The ISM index for non manufacturing accounts for 90 per cent of the economy and last month fell to a reading of 54.3 - the slowest pace in nearly four years. However, the Dollar managed to remain firm despite the report but may come under some pressure this afternoon as a report on the U.S housing market is expected to show another monthly drop in home sales.

The Euro has made substantial gains against the Pound over the past week as we traded just under 1.4700 for the majority of the session yesterday but the single currency actually fell 0.7% versus the Dollar after a report on European service industries. Growth in the sector, which accounts for the largest proportion of the economy, slowed in February after the introduction of the value-added tax increase in Germany dampened consumer sentiment. The Purchasing Manager's index fell to a reading of 57.5 from 57.9 in January and the report will only fuel speculation that economic growth may slow this year following the fastest expansion in six years in 2006. However, a separate gauge of the report showed an improvement in business expectations and combined with low unemployment and a pick-up in manufacturing, we fully expect the ECB to raise interest rates this week. The Euro may come under some pressure this morning following a host of significant economic data released in the Euro-zone. The focus will fall on European retail sales, which is expected to drop 0.3% in January after higher interest rates and the VAT increase in Germany continues to weigh on sentiment.

Data Released 6th March

EU 10:00 Retail Sales (January)

EU 10:00 Revised GDP (Q4)

U.S 13:30 Productivity (Q4 Revised)

- Unit Labour Costs

U.S 15:00 Pending Home Sales (January)

U.S 15:00 Factory Goods Orders

written by Adam Solomon