Euro falters as doubts grow over outcome of ECB meeting tomorrow, as UK service sector grows

Tom Tong05/Sep/2012Currency Updates

GBP

The ECB meets on Thursday and is widely expected to announce a bond buying program aimed at lowering borrowing costs for Spain and Italy. The eurozone is the UK’s biggest trading partner and any easing of the crisis is seen as positive for sterling, especially against the dollar.

Sterling fell from a two-week high on Tuesday after UK construction sector data disappointed, as the data showed British construction activity to fall unexpectedly last month as new orders slumped at the fastest pace since the height of the 2008-2009 financial crisis.

However, sterling clawed back its losses against the euro which fell by 0.3% in afternoon trading after UK services PMI data (the UK’s dominant services sector) came in stronger than forecast helping it shrug off the weaker than expected construction PMI, adding to speculation the UK economy may be emerging from recession.

The Bank of England meets on Thursday, although policymakers are expected to keep interest rates and the quantitative easing total unchanged, reinforced by services PMI.

EUR

European leaders are stepping up shuttle diplomacy as they brace for their central banks’ plans to defend the euro from bond market turmoil. The common currency had a case of jitters yesterday, as investors remain unsure as to what outcome we see from tomorrow’s crucial ECB meeting. Investors are beginning to worry that the ECB will continue to outline the issues in the eurozone, rather than lay out details of specific solutions to stem the eurozone debt crisis. Speculation has also arisen that the ECB may also cut interest rates as the 17-nation euro area heads towards a recession as many people are realizing that monetary policy is broken in Europe.

USD

The US manufacturing PMI shrank for a third month in August in the longest decline since the recession ended in 2009, threatening to deprive the world’s largest economy of a driver of growth. Stocks fell off the back of this as US factories, which sparked the expansion three years ago, are succumbing to a manufacturing slowdown, confirming Bernanke’s view in his most recent speech that the economy is too weak to spur hiring and requires monetary stimulus.

In spite of this weak data the dollar carved out hefty gains against major rivals on Tuesday. It is also still taking advantage of Monday’s weak Chinese and European manufacturing reports. In Asian trading the dollar rose as stocks declined boosting demand for the go to safe haven currency as disappointing economic data came out of China and Australia.

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Written by Tom Tong

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