EUR advances as eurozone manufacturing sector expands for first time in 2 years

Tom Tong25/Jul/2013Currency Updates

EUR

Yesterday’s trading session saw the EUR advancing against the majority of the 16 most-traded currencies following the release of the PMI (Purchasing Managers’ Index). The better than expected figures – for France 49.8 vs. 48.9 forecast and for Germany (the European Union biggest economy) 50.3 vs. 49.3 forecast, showed manufacturing in the European Union has unexpectedly expanded in July which thereby led to the bolstering of the demand for the region’s assets. Moreover, this was the first time in two years that the flash PMI popped above the 50.0 line, suggesting industry expansion. (figures above 50.0 suggest industry expansion, whereas lower than 50.0 signal industry contraction). As a result the EUR advanced as much as 0.3%, the highest level since June 20, before falling 0.2 percent against USD.

However, we should put a note that ECB’s President Mario Draghi after policy makers’ last meeting provided a forward guidance that the ECB will keep monetary policy accommodative and perhaps even lower interest rates (currently the benchmark rate is at a record low of 0.5%) in order to boost growth. Therefore, the upward trend that we have seen in the EUR against the USD for the past month might not be here to stay for long.

Today in terms of important data releases from the EU we are expecting to see the second quarter Spanish Unemployment rate and German Ifo Business Climate Index, both important indicators for the health of the economy.

GBP

There wasn’t much data released from the UK ahead of the second quarter GDP figures released today. We saw CBI Industrial Order Expectation Index released yesterday – a leading indicator of economic health, which showed that new orders increased in the manufacturing sector in the 3 months to July for the first time in a year while production continued to rise modestly.

Sterling was little changed yesterday and was trading at the highest level since June 26 against the USD. With regards to the EUR, the pound touched strongest point since July 10. The recent sterling rallies across the board became more accentuated when U.K. data was coming in better than expected.

Today we are set to receive an initial estimate of second-quarter GDP, which will guide expectations for the next round of UK updates in the coming days and weeks. Britain is the first of the Group of Seven nations to report GDP for the second quarter. UK economic growth will probably have accelerated in the three months through June as Britain posted its first consecutive quarters of expansion in almost two years, which prevented the country from falling into a triple dip recession.

USD

Yesterday the USD rallied across the board on Wednesday, bolstered by a rise in US Treasury yields that suggested the ongoing recovery in the world’s largest economy was firmly on track. We saw both the Flash Manufacturing PMI and the New Home Sales data coming out of the US. The flash Manufacturing PMI has beaten analysts estimates as figures came out at 53.2 vs. the 52.5 forecast, suggesting an expansion in the economy. Sales of new U.S. homes rose in June to the highest level in five years, pointing to gains in residential construction that will support the economic expansion in the second half of the year.

Purchases climbed 8.3 percent to an annualized pace of 497,000 homes, the highest level since May 2008, the Commerce Department said today in Washington.

Growing employment and the desire to take advantage of historically low borrowing costs before they rise further will probably keep releasing pent-up demand, driving builder confidence and sustaining increases in home construction. Federal Reserve Chairman Ben S. Bernanke last week said policy makers are prepared to act if the recent jump in borrowing costs shows signs of hurting demand.

Data coming out today will see Core Durable Goods Orders m/m and also US Jobless Claims. Analysts expect modest growth in Core Durable Goods Orders versus the previous month. With regards to Jobless Claims, we have seen a drop in from the forecast 344K to 334K, close to a five-and-a half year low. However, analysts expect a modest rise in today’s number, but nothing that would derail the generally positive trend.

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Written by Tom Tong

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