Daily Insight

Following on from last week, the Dollar declined heavily against the majors on Friday amid a host of negative economic reports that showed an expected slowdown in the services sector and labour market. The monthly U.S job report came in much weaker than initial forecasts as the economy added just 92,000 jobs to payrolls in July, the weakest level since February and the third lowest in two years. Despite a sharp rise in U.S consumer confidence and a drop in the average weekly jobless claims, companies are seemingly reluctant to continue hiring as the drop in payrolls brought the unemployment rate up to 4.6% and the highest level since September last year. As a result, the Dollar fell considerably against the Pound, resuming the downward trend that saw the U.S currency slump to the lowest level in over a quarter of a century last month. There may be little respite for the Dollar this week as the focus switches to the FOMC interest rate announcement on Tuesday where the Fed are widely expected to hold rates at 5.25% for the ninth consecutive month.

The Euro remained largely unchanged versus the Pound last week but made robust gains against the Dollar following the ECB interest rate announcement and press conference on Thursday. The President of the Central Bank, Jean-Claude Trichet, acknowledged that the European economy had accelerated at the fastest pace in seven years and promptly signalled that the governing council would be raising interest rates next month. In each of the last eight statements prior to a rate increase, Trichet has used a specific tone and language to signal the intent of the governing council, saying that "strong vigilance" is needed to ensure that risks to price stability do not materialize. In terms of economic data, the Euro may remain on the front foot this week as Thursday's ECB monthly bulletin may contain further detail on the outlook for European monetary policy as reiterate the hawkish stance expressed by Trichet last week. Elsewhere, German manufacturing data may show that factory orders fell 0.6% in June following a significant increase of 3.2% in May while the annual growth rate may rise to 10.7%.

The Pound resumed the upward momentum against the Dollar last week and also remained relatively strong versus the Euro despite the Bank of England's decision to leave interest rates unchanged at 5.75%. However, the UK currently has the highest borrowing costs of all the G7 nations and therefore is still an attractive proposition to investors looking to get a higher return on their investment. In terms of economic data, the Bank of England's quarterly inflation report will be much anticipated on Wednesday and should provide an insight into monetary policy and the chances of a further rate increase in September. Elsewhere, UK industrial production is expected to show moderate growth in June as manufacturing output rises 0.2% from the previous month. Nevertheless, it can be argued that the Pound is not currently data sensitive as events on global debt and equity markets will set the tone for Sterling, which remains well off the recent highs against the Dollar as risk aversion builds and carry trades are unwound.

Data Released 6th August

UK 09:30 Industrial Production (June)

- Manufacturing Output

GER 11:00 Manufacturing Orders (June)

written by Adam Solomon