Daily Insight

The Pound snapped a seven day winning streak against the Dollar yesterday while also remaining largely unchanged versus the Euro following yet another round of poor economic data as growth in UK service industries grew at the slowest pace in nearly five-years.

An index of services fell to a reading of 53.1 in October from 56.7 the previous month, which has heightened concerns that the UK economy is poised to slow in 2008 amid five consecutive rate increases and a jump in corporate credit costs.

UK service industries account for three-quarters of GDP and has propelled the economy to the fastest pace of expansion in three-years. Therefore, the Pound may struggle to make gains against the majors amid further speculation that the Bank of England will cut interest rates early next year.

Elsewhere, a separate report from the Office of National Statistics showed that factory production fell 0.6% in October and to the lowest level in seven months as the Pound's rise to a 26-year high against the Dollar cooled overseas demand.

In addition, with oil prices rapidly approaching $100 a barrel, manufacturing is beginning to weaken as companies are forced to endure higher prices while their goods become more expensive.

The reports yesterday will only serve to increase speculation that the Bank of England will need to lower UK interest rates in the first quarter of 2008.

The dramatic appreciation of the Euro has seen the currency rise to the highest level on record against the Dollar while also rallying to a 2-year high versus the Pound as the ECB continues to retain a tightening bias despite concerns over a global credit crunch.

The chairman of the Central Bank, Jean-Claude Trichet, has the unenviable task of picking sides amongst a divided governing council with policy makers expected to leave the benchmark interest rate unchanged this Thursday.

The recent turmoil surrounding financial markets may force the ECB to abandon plans to continue raising interest rates despite consumer price inflation rising to the highest level in two years.

The focus this morning will fall on the Purchasing Managers' index for European service industries with growth expected to accelerate in October amid a significant rise in consumer spending. Elsewhere, the September producer price index may show that factory-gate inflation increased by 0.3% from August and to an annual rate of 2.6%.

The Dollar managed to stem any further losses versus the Pound yesterday and also remained virtually unchanged against the Euro amid reports that growth in U.S service industries unexpectedly accelerated in October.

The ISM index on non-manufacturing businesses, which make nearly 90% of the economy, rose to a reading of 55.8 from 54.8 in September with a figure above 50 indicating expansion.

A strong labour market has encouraged Americans to increase spending while improvements in business investment and exports have helped maintain the six-year economic expansion even as the housing recession continues to take hold.

However, the Institute of Supply Management released a separate factory index, which showed that production had contracted as manufacturers received the fewest orders in seven months.

Forecasts for U.S economic growth have been scaled back since a big jump in subprime mortgage defaults caused massive volatility in global credit costs.

Data Released 6th November

EU 09:00 Services PMI (September)

EU 10:00 Retail Sales (September)

written by Adam Solomon