Daily Insight

Following on from last week, the negative sentiment surrounding the Dollar continued on Friday as the U.S currency declined back above 2.0300 versus the Pound following a surprisingly weak report on the U.S labour market.

Initial forecasts seemed to suggest that economists were looking for U.S companies to have added 100,000 jobs to payrolls last month. However, the report was much worse than anticipated as non-farm payrolls had dropped for the first time in four years on a month-to-month basis while the July numbers were also revised down from 92,000 to just 68,000.

The shocking extent of this contraction will provide increased speculation that the Federal Reserve will have no choice but to cut interest rates on the 18th September. The only thing to consider now will be whether policy makers elect to ease rates by 25 or 50 basis points as the impact from the subprime mortgage and credit crisis spreads to the real economy.

U.S economic growth has been largely dependent on a strong labour market this year and the report last week will shift the focus onto the retail sales numbers on Friday as the job losses points to weak consumer spending in the months ahead as well as the increased risk of recession.

The Euro remained largely unchanged against the Pound last week and also made sharp gains versus the Dollar despite the ECB's decision to hold interest rates in September.

The increased volatility surrounding financial markets has provided further speculation that the fallout from the U.S subprime mortgage crisis will force the Central Bank to leave rates on hold for the remainder of the year.

Over the past month, the ECB has been forced to lend emergency liquidity to banks and released upto €42.25 billion into European money markets last week in attempt to bring some stability back to the market. As a result, the governing council neglected to lift rates this month and in the accompanying press conference, the chairman, Jean-Claude Trichet, indicated that policy makers are willing to wait and see if the subprime credit crisis is likely to slow economic growth.

The focus this week will fall on Trichet's testimony to the EU parliament, which is expected to attract plenty on attention, particularly given the level of uncertainty regarding the next move in euro-zone interest rates.

The Pound has been gathering momentum against the Dollar over the past week and has also remained firm versus the Euro amid a spate of positive economic reports, which have shown that the UK economy remains in good health despite the impact of the crisis in the U.S.

However, a report from the National Institute for Economic and Social Research last week showed that UK economic growth slowed in the three months through August and may continue to moderate following five interest rate hikes in the past year. The economy expanded 0.7% in the third quarter, down from 0.9% in the three months through May as the NIESR maintains that the Bank of England has "no need" to lift interest rates again this year.

There is a plethora of significant economic reports released this week including a number of house price surveys, the producer price index and unemployment count, which are all expected to be strong and are unlikely to change the markets view that rates are on hold for the foreseeable future.

Data Released 10th September

UK 09:30 DCLG House Prices (July)

UK 09:30 Producer Price Index (August)

written by Adam Solomon