Daily Insight

The Euro managed to make marginal gains against the Pound yesterday and also advanced 0.2% higher versus the U.S Dollar as we build up to the ECB interest rate announcement this lunchtime. The governing council are widely expected to lift interest rates by a further 25 basis points with the benchmark lending rate rising for the eighth time in little over a year to stand at 4.0%. Following a host of hawkish statements from a number of ECB officials, the market has already factored in a rate increase in June and therefore the focus will fall on the accompanying press conference and the statement from the chairman, Jean-Claude Trichet. Recently, several members of the governing council within the Central Bank have publicly criticised Trichet's "over-reliance" on money supply as a gauge of economic performance and inflation. Nevertheless, the ECB are still expected to raise interest rates by a further quarter-point over the coming months and the Euro may rally if the statement provides an insight into the timing of the announcement. In terms of economic data, the single currency also received a boost yesterday as the Purchasing Manager's index showed that European service industries expanded for the first time in four months in May. Growth in the sector, which represents the largest proportion of the economy, has stagnated in recent months as higher borrowing costs and the VAT increase in Germany weighed on consumer sentiment.

The strength of the Pound has been gathering momentum this week and yesterday the UK currency increased a further 0.1% against the U.S Dollar following the stronger-than-expected report on UK service sector growth. Activity in both the manufacturing and service sector has been accelerating in recent months and will only boost interest rates expectations after the prices paid component of the reports also made strong gains. However, a separate report from the Chartered Institute of Purchasing and Supply showed that growth in services remained unchanged in May while retail sales fell from 2.4% in April to just 1.8% in May. Nevertheless, the Pound continued to make gains as we build up to the Bank of England interest rate announcement tomorrow where the MPC are expected to hold rates at 5.50% in June. Elsewhere, a report from the Nationwide Building Society has also provided some support for the Pound as UK consumer confidence reached the highest level in 18-months in May. The sentiment index rose to a reading of 99.0, increasing for the fourth consecutive month as consumers became increasingly optimistic about the labour market and the strength of the economy.

The Dollar continued to come under pressure yesterday, dropping modestly against the Pound and falling close to a 3-week low versus the Euro despite a strong report on U.S service industries. The Institute of Supply Management showed that its index reached the highest level in a year last month, confirming that the weakness in the U.S Dollar has not just provided a boost to the manufacturing sector. The components measure of the ISM report also showed that prices paid, employment and new orders all made strong advances in May and provided an indication that service sector growth would continue to support U.S economic growth. Elsewhere, the chairman of Federal Reserve, Ben Bernanke, tried in vain to boost the ailing Dollar as his comments reiterated that the Fed expects the housing slump to continue this year while inflation risks remain a concern to policy makers. In short, the statement emphasised recent sentiment that the Federal Reserve will keep interest rates on hold at 5.25% for the remainder of 2007.

Data Released 6th June

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

GER 11:00 Manufacturing Orders (April)

U.S 13:30 Productivity (Q1 Revised)

- Labour Costs

written by Adam Solomon