Daily Insight

The Dollar came under renewed pressure against the majors yesterday as the Dow Jones plunged 150 points over the course of the day, taking carry trades down with it, while another spate of negative economic reports project difficult times ahead for the U.S economy.

During the increased state of turmoil surrounding financial markets over the past month, the Dollar has benefited from the renewed appetite for risk aversion, which saw domestic and international traders flock to the relative safety of U.S treasuries. However, the Dollar plunged against most of the major currencies yesterday and the lack of any positive movement suggests that the outlook for U.S economic growth is becoming so bleak that traders are looking to invest their money elsewhere.

In terms of economic data, the U.S currency made further losses following a report from the National Association of Realtors', which showed that pending home sales plunged by the most since records began in 2001. The two-year housing recession is showing few signs of abating as the index collapsed 12.2% in July after gaining 5% in June with the decline more than five times initial forecasts.

Elsewhere, the ADP employment survey increased by a modest 38,000 in August and the report will provide an insight into the NonFarm payrolls numbers tomorrow and the current state of the U.S labour market.

The Euro has been largely range bound against the Dollar this week and has weakened modestly versus the Pound as we build up to one of the most important events this week, the ECB interest rate announcement. Typically, the European Central Bank prefers to let the market know in advance what they plan to do with regards raising interest rates and the chairman, Trichet, has stated in August that "strong vigilance" will be required in order to prevent the risks to price stability.

However, given the recent move in European bond yields, the Central bank has little option but to keep rates unchanged at 4.00% this lunchtime as inflation also remains under the 2.0% threshold. Although the governing council are likely to hold rates in September, the focus will fall largely on the accompanying statement where Trichet may adopt the same tone and language as in August and thusly leave the door open for further rate increases this year.

However, should the ECB leave rates unchanged and fail to use the same hawkish terminology in the accompanying statement then the Euro should fall significantly against both the Pound and the Dollar. Therefore, Euro buyers would be well advised to place a stop order in the market to protect against a surprise decision from the ECB and counter a possible downward move.

The Pound rose against both the Euro and the Dollar yesterday as we build up to the Bank of England interest rate announcement at midday where the monetary policy committee are widely expected to hold UK interest rates at 5.75%.

Policy makers are becoming increasingly concerned with the moves in bond markets and with inflation below the 2.0% target last month, the MPC can afford to wait and assess the impact of five rate increases over the past year.

Three month sterling rates have jumped to the highest level in over 8-years, which has raised speculation that the Bank of England may need to inject some liquidity into financial markets to shield the economy from higher borrowing costs.

However, unlike the ECB, the Bank of England will release the minutes from the two day meeting later this month and therefore we will have to wait to gauge the chances of a further rate increase this year.

Recent economic reports have shown that growth in manufacturing and service industries continues to accelerate and a report this morning may show that industrial production increased 0.2% in July.

Data Released 6th September

UK 09:30 Industrial Production (July)

- Manufacturing Output

UK 12:00 BoE Interest Rate Announcement

EU 12:45 ECB Interest Rate Announcement

EU 13:30 ECB Press Conference

GER 11:00 Industrial Orders (July)

U.S 13:30 Initial Jobless Claims (w/e 1st September)

U.S 13:30 Labour Costs (Q2)

- Productivity

U.S 15:00 ISN Non-Manufacturing (August)