Daily Insight

The Pound rallied against both the Euro and the Dollar yesterday, rising 0.3% by the close of trading last night following a stronger-than-expected report on the UK manufacturing sector. Growth in factory output accelerated at the fastest pace in three months in July while a gauge of output prices reached a record level, adding to the case for a further interest rate hike in September. The index from the Chartered Institute of Purchasing and Supply climbed to a reading of 55.7 last month from a revised 54.7 in June with a figure above 50 indicating expansion. The index of output prices rose to 57.5, the highest since records began in 1992 and provides an indication that the Bank of England have the scope to raise rates to 6.0% as early as next month. Consumer price inflation has exceeded the Bank's 2.0% target for the past 14-months but the monetary policy committee are expected to keep interest rates on hold in the monthly meeting this lunchtime. As a result, the Pound may come under significant pressure against both the Euro and the Dollar as we have to wait until the 15th August for the release of the minutes of the meeting in order to gauge the chances of a further rate hike next month.

The Euro lost ground against Sterling yesterday but increased 0.2% versus the U.S Dollar as slower manufacturing growth in Germany and France did not hamper the over PMI number, which showed that factory output throughout the whole of Europe accelerated faster than expected. Nevertheless, the report yesterday should have little influence on the European Central Bank's interest rate decision this afternoon where the governing council are expected to leave the benchmark lending rate on hold at 4.0%. Earlier this week, the Euro staged an unlikely rally on the basis that the chairman of the Central Bank, Jean-Claude Trichet, may hold a surprise press conference in the aftermath of the announcement and suggest that an interest rate rise is likely in September. The harmonised consumer price index has recently shown that inflation has moderated to 1.8% over the past month, moving further under the ECB's 2.0% ceiling while the recent volatility in the global equity markets may force Trichet to adopt a more neutral stance with regards monetary policy.

The Dollar declined against both the Euro and the Pound yesterday amid a host of mixed economic data as the ADP employment report showed that U.S companies added fewer jobs than forecast in July. The report, which provides an insight into the Nonfarm payrolls numbers of Friday, showed that companies added 48,000 jobs last month, the smallest amount in over four years. The downturn in the labour market followed a revised gain of 143,000 in June as the worst slump in housing for 17-years combined with slowing consumer spending may have prompted companies to slow hiring. Elsewhere, a separate report from the Institute of Supply Management showed that U.S manufacturing expanded at close to the fastest pace in more than a year last month following a dramatic increase in orders and demand from overseas. The ISM index dropped to a reading of 53.8 in July, which was slightly lower than forecast although the index matched the overall average of last year with a figure above 50 indicating expansion.

Data Released 2nd August

UK 12:00 BoE Policy Announcement

EU 12:45 ECB Policy Announcement

EU 10:00 Producer Price Index (June)

U.S 13:30 Weekly Jobless Claims (w/e 28th July)

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

written by Adam Solomon