Daily Insight

The Pound rose for a fourth consecutive day against the Euro and also remained largely unchanged versus the Dollar following a stronger-than-expected report on UK manufacturing activity. The CIPS survey was expected to show that factory output declined in August but the strongest level of growth in nearly 13-years drove the index to a reading of 56.3 and to the highest level since 2004. Although the overall tone of the report seems quite positive, both input and output prices dropped from the previous month and that may convince the Bank of England to keep interest rates on hold in September. The latest round of inflation data showed that consumer prices dropped under the Central Bank's 2.0% target for the first time in over a year in July while evidence that consumer spending is slowing may influence monetary policy in the fourth quarter. The lack of inflationary concerns will allow the Bank of England tome to monitor financial and credit market conditions before deciding on whether to press forward and raise interest rates to a fresh six-year high by the turn of the year.

Aside from the U.S non-farm payrolls report, the European Central Bank interest rate announcement could be the catalyst for a move in the market this week and the Euro has been under pressure following a shift in sentiment from policy makers. Typically, the ECB will let the market know in advance of an impending rate increase but considering the increased volatility in financial markets, the Central Bank may keep the market guessing right up until the midday announcement. The Euro has fallen significantly against both the Pound and the Dollar over the past week amid a spate of dovish comments from a number of members from the ECB's governing council. In terms of economic data, the Euro may come under further pressure this morning as the revised estimate of Eurozone GDP is expected to show that economic growth remained unchanged at an annual rate of 2.5%. Elsewhere, a separate report may show that producer price inflation rose 0.1% on the month in July although annual pace of inflation is expected to drop towards 1.7%.

The U.S Labour Day holiday yesterday saw the Dollar remain largely unchanged against most of the major currencies but considering the packed calendar of U.S economic data this week, we may see increased volatility surrounding the Dollar. The recent statement from the chairman of the Federal Reserve, Ben Bernanke, was as convoluted as ever when he said that the Fed is in a position to do whatever is necessary to provide liquidity to the market. Elsewhere, President Bush announced a new program to help struggling homeowners cope with the impact of the U.S subprime mortgage crisis. However, in the aftermath of the statement from the Fed chairman on Friday, bond markets and carry trades failed to respond and that provided some speculation that a U.S interest rate cut is not yet a done deal. The Dollar may come under further pressure this afternoon amid the release of the ISM manufacturing report, which may show that the pace of activity fell in August.

Data Released 4th September

EU 10:00 GDP (Q2 Revised)

EU 10:00 Producer Price Inflation (July)

U.S 15:00 Construction Spending (July)

U.S 15:00 ISM Manufacturing (August)

written by Adam Solomon