Daily Insight

The recent positive sentiment surrounding the Dollar continued yesterday as the U.S currency rose 0.2% against the Euro and also made significant gains versus the Pound
following yet another round of surprisingly positive economic reports. U.S service sector growth accelerated by more than anticipated in April and following the unexpected rise in manufacturing output and factory goods orders, the economy seems to be gathering momentum after slowing in the first quarter. The ISM index of non-manufacturing companies advanced to a reading of 56.0 last month from 52.4 in March with a figure above 50 indicating growth in services, which accounts for 90% of the economy. Elsewhere, the Dollar shrugged off an earlier report to rise to the highest level in nearly a month versus the Pound as U.S productivity rose to an annual rate of 1.7% in the preliminary estimate for the first quarter. The quarterly survey rose 2.1% in the final three months of 2006 while unit labour costs rose just 0.6%, providing an indication that inflation will continue to moderate this year. In terms of economic data, the resurgence of the Dollar may be severely tested this afternoon as the focus will fall heavily on the monthly U.S job report. Following the downward swing in the ADP employment report earlier this week, it is widely anticipated that the economy added fewer jobs to payrolls in the past month with the unemployment rate rising to 4.5%.

The Euro remained largely unchanged against the Pound yesterday but fell for a second consecutive day versus the Dollar following a sparse supply of economic data released in the Euro-zone. However, the single currency may receive a timely boost this morning as the Purchasing Manager's index into European service industries is expected to increase modestly in April. Recent reports have suggested that consumer and business confidence have been increasing at a robust level over the past month and the gauge of service sector growth this morning may emphasise the need for higher interest rates. In addition, a separate report may show that European retail sales increased dramatically in March, rising 0.6% from the previous month to an annual rate of 2.4%. The European Central Bank have given a strong indication that a rate hike is scheduled for June and recent hawkish comments from a number of governing council members has reinforced the chances of further monetary tightening beyond June.

The Pound continued to decline against the U.S Dollar yesterday and by the close of trading last night the market was trading close to the trend support at 1.9875 as the UK currency struggles following another round of poor economic reports. The CIPS survey into UK service industries showed that growth in sector expanded at the slowest pace in seven months in April. The reports provides the latest indication higher interest rates are beginning to cool economic growth after UK mortgage approvals dropped to the lowest level in almost a year earlier this week. Services accounts for three-quarters of gross domestic product and have propelled the UK economy to the fastest pace of expansion in over two-years. Consumer price inflation is currently running at the fastest pace in a decade and that is expected to prompt the Bank of England to increase the interest rates to 5.50% next week. However, recent economic reports have all but diminished the prospect of a 50 basis point rise and that may weigh on Sterling in the build up to the announcement.

Data Released 3rd May

EU 09:00 PMI Services (April)

EU 10:00 Retail Sales (March)

U.S 13:30 Non Farm Payrolls (April)

- Average Hourly Earnings

- Unemployment Rate

written by Adam Solomon