Daily Insight

The Pound snapped a four-day winning streak against the Euro yesterday and also declined significantly versus the U.S Dollar despite continued strength in UK economic data. A report from the British Retail Consortium showed that retail sales rebounded strongly in August while construction spending hit the highest level in nine-years over the same period. The recent spate of positive economic news seems to suggest that the UK economy is immune to the problems in the U.S as strong consumer spending combined with continued growth in the housing market will justify the Bank of England's lack of concern over the volatility surrounding financial markets. UK house prices rose for an eighth consecutive month in August with the average cost of a home climbing 0.4% to £199,700 following a 0.8% increase in July. The report from HBOS plc showed that five interest rate increases over the past year have yet to curb demand for property and that may prompt the Bank of England to lift interest rates to 6.0%. Nevertheless, the Pound declined against the majors but may find some support this morning as growth in the service sector is expected to be strong given that activity in the construction sector has been so strong.

The Euro rebounded strongly against Sterling yesterday but the single currency continued to weaken versus the Dollar as be build up to the ECB interest rate announcement tomorrow. In terms of economic data, producer price inflation was modestly above expectations in July but the annualized pace of economic growth still came in below 2.0% although that is not expected to influence the ECB's monetary policy. However, there is only a slim chance that the governing council will lift interest rates this month as policy makers assess the widespread problems in the financial sector with more German banks expected to report large subprime related losses. In terms of economic data, the Euro may find some support this morning ahead of tomorrow's announcement with the release of the purchasing managers' index, which is expected to show that growth in service industries remained robust in August. Elsewhere, a separate report later today may show that Euro-zone retail sales increased 0.3% from July with the annual pace of sales up 1.0% from this stage last year.

The Dollar benefited from a strong rally in the Dow yesterday, which was up 91 points on the first day of trading in September as the U.S currency rallied almost a point versus the Pound by the close of trading last night. Although this helped lift so-called carry trades, the mixed performance in bond yields suggests that the financial markets have yet to reclaim a strong sense of stability and that may be positive for the Dollar as appetite for risk aversion continues to dominate. There is a plethora of significant economic news released this week and the Dollar seemed to shrug off a particularly negative report on U.S manufacturing yesterday, which grew at the slowest pace in five months in August. The ISM index is one of the first surveys to show how the impact from the mortgage crisis is affecting the economy and points to slower growth over the coming months. Elsewhere, U.S construction spending unexpectedly fell in July to the lowest level since January, indicating that the worst slump in housing since 1990 will continue to hamper economic growth in the third quarter.

Data Released 5th September

UK 09:30 CIPS Services PMI (August)

EU 09:00 Services PMI (August)

EU 10:00 Retail Sales (July)

U.S 13:15 ADP Employment Report (August)

U.S 15:00 Pending Home Sales (July)

U.S 19:00 Fed Beige Book

written by Adam Solomon