Daily Insight

The Euro managed to claw back some gains against the Pound yesterday and also remained largely unchanged versus the Dollar despite the ECB's decision to hold interest rates at 4.00% in September.

Amid the increased volatility in financial markets in recent weeks, the European Central Bank neglected to lift borrowing costs despite a strong indication of a rate increase in August. The chairman of the ECB, Jean-Claude Trichet, stated last month that "strong vigilance" would be required to ensure that risks to price stability do not materialize.

However, with the increased uncertainty surrounding credit markets, the ECB has been forced to lend emergency cash to banks and released upto €42.25 billion into money markets yesterday in an attempt to stem the losses incurred from the U.S subprime mortgage crisis.

In the aftermath of the rate announcement, Trichet stated that the governing council voted unanimously to keep interest rates unchanged this month and are prepared to wait and see whether the turmoil surrounding financial markets will slow economic growth. In the accompanying press conference, it was clear that the ECB would adopt a neutral stance over the coming months and a further rate increase would depend on a number of economic factors.

The Pound held firm against the Dollar yesterday but made moderate losses versus the Euro following the Bank of England's decision to hold UK interest rates at 5.75% as the MPC attempt to determine whether a surge in credit costs will hamper growth in the economy.

The Monetary policy committee, led by the governor Mervyn King, kept the benchmark lending rate at a six year high this month but we will have to wait until the 19th September to gauge how the nine-strong committee voted. In the accompanying statement released yesterday, the BoE declared that "the recent solid pace of output growth has been sustained" while "it is too soon to tell how far the disruption in financial markets will impair the availability of credit to companies and households."

This was the first time since May 1999 that the Bank of England have issued a statement after keeping interest rates unchanged and the last time they did, policy makers lowered interest rates the following month.

In terms of economic data, a report from the National Institute of Economic and Social Research showed that UK economic growth slowed in the three months through August.

Although the focus will fall squarely on the monthly U.S job report this afternoon, the Dollar has been under pressure amid speculation that the Federal Reserve will cut interest rates later this month.

The uncertainty surrounding bond and stock markets could be further exasperated if the Fed fail to meet market expectations and delay an inevitable rate cut for another month. Therefore, the Nonfarm payrolls numbers will be of greater significance as the report may act as a catalyst to the Fed and a weak number would signal that housing recession is spilling over into the broader economy.

The ISM report yesterday showed that growth in the service sector expanded at a faster pace than forecast in August but the employment component of the report dropped back into contractionary territory for the first time since September 2003. However, initial forecasts suggest that U.S job growth picked up in August with employers adding 100,000 workers to payrolls last month following an increase of 92,000 in July.

Data Released 7th September

GER 11:00 Industrial Production (July)

U.S 13:30 NonFarm Payrolls (August)

-Average Earnings

-Unemployment Rate

U.S 15:00 Wholesale Inventories (July)

written by Adam Solomon