Daily Insight

Following on from last week, the Dollar received a timely boost on Friday after the release of the monthly U.S employment report, which showed that the economy added 157,000 jobs to payrolls last month. The figures were significantly higher than anticipated and the data provides an indication of the strength of the labour market as the unemployment rate held steady at 4.5% while average hourly earnings increased 0.3%. The U.S economy has suffered the worst pace of expansion in over four-years following the slump in manufacturing and the property market but recent reports have indicated that a strong labour market will continue to fuel consumer spending in the face of near-record fuel prices. However, the Dollar failed to sustain the positive momentum and later in the session continued to decline against the Pound as a separate report showed that U.S personal spending rose less than forecast in April. The Federal Reserve's preferred measure of inflation increased just 0.1% from the previous month and the figures supports the Fed's view that economic will pick-up in the second half of the year. The focus this week in terms of economic data will fall largely on the ISM non manufacturing survey tomorrow, which is expected to fall modestly in May but remain well above a reading of 50.0. Amid a sparse week of economic indicators, the report should provide an insight that growth in the services sector continues to expand at a reasonable pace.

The Euro declined against the Pound towards the end of last week, trading back towards 1.4750 by the close of trading on Friday as the Purchasing Manager's index of European manufacturing showed that growth in the sector slowed in May. The PMI index unexpectedly fell to a reading of 55.0 last month and although a figure above 50 indicates expansion, factory output expanded at the slowest pace in over a year. Recent reports have indicated that European economic growth, which has reached the fastest pace in over seven years, has finally peaked following higher interest rates and a slowdown in the U.S, which threatens to curb demand for European exports. The ECB are scheduled to meet on Wednesday and are expected to raise interest rates for the eighth time since late 2005 after clear signals from a number of ECB governing council members. Recent reports have indicated that mounting inflationary concerns will force the Central Bank to continue lifting rates beyond 4.0% this year. Further evidence of this may be provided in a report this morning, which is expected to show that producer price inflation rose 0.4% in April as companies increase prices following the fastest pace of economic growth since 2000.

The recent positive momentum surrounding the Pound continued on Friday as the CIPS survey showed that growth in the UK manufacturing sector unexpectedly accelerated in May. The index rose to a reading of 54.9 last month, the highest level since February as increased demand from Europe helped factories supplement higher interest rates and a stronger Pound. The unexpected growth in the sector is fuelling speculation that the Bank of England could raise interest rates to 5.75% as early as this Thursday in a bid to curb inflation, which has reached the highest level in a decade over the past month. The Pound has been making widespread gains in the build-up to the announcement but the considered view is that the monetary policy committee will resist lifting rates back-to-back in June and will wait until July/August when a rise in rates would coincide with the Bank's next quarterly inflation report.

Data Released 4th June

UK 09:30 CIPS Construction Survey (May)

EU 10:00 Producer Price Index (April)

U.S 15:00 Factory Goods Orders (April)

written by Adam Solomon