Strong day for the USD following emerging market turmoil and investors reverting to dollar-denominated assets

Tom Tong23/Aug/2013Currency Updates

EUR

The Eurozone enjoyed a strong day yesterday on the back of a PMI increase in August resulting in the highest rise since May 2011 for manufacturing and services. The Flash estimate of the Eurozone composite PMI rose to 51.7 from 50.3 in July. Once again the shining light for the region was Germany, where export numbers jumped pushing PMI to 53.5. The only major economy that is still struggling in the region is France. Manufacturing PMI came in at 49.7 which came as a disappointment with PMI expected to reach 50.4.There was further disappointment with services PMI at 47.7 as opposed to an expected 49.3.

Although the EUR saw some positive news, there is still concern that Greece will not be able to continue without a fresh round of bailouts.

Tuesday saw Wolfgang Schauble, German Finance Minister announce Greece would need further financial assistance in order to help restore stability in their Economy which was backed by Jeroen Dijsselbloem – the president of the Eurogroup.

The only data release today from the Eurozone is the revised GDP for Germany which is expected to remain a 0.7 percent.

GBP

Following six months of growth, the pound weakened for a second day yesterday against both the Dollar and Euro as a result of comments made by BOE policy maker Martin Weale in an interview with the Daily Telegraph. Weale stated there may be circumstances where it “would be sensible to undertake further asset purchases” with regard to extending the central bank’s £375 billion bond buying program. Such circumstances may include increasing turmoil in emerging markets and further shocks to the Eurozone. Thus, putting the Sterling under even greater pressure.

UK 10-year gilt yields increased to the highest level since 2011 on the back of announcements made by the Fed with regard to slowing down its asset debt purchases, thus reducing demand for for fixed income securities.

UK GDP data for Q2 is released this morning, with an expected increase of 0.6 percent, in line with the previous reading announced on July 25.

USD

Yesterday the Greenback traded higher against its rival currencies despite a series of mixed economic data. Dollar strength has been drawn from the recent rise in US Treasury yields, setting a two-year high of 2.936% on Thursday. The expectation that the Federal Reserve will begin to unwind stimulus as early as next month is increasing the attractiveness of Dollar-denominated assets. The minutes of the Fed’s July meeting have done little to change market expectations of the tapering timetable. Many economists believe that the announcement of the taper will be announced at the end of the next Fed meeting on Sept. 18.

Analysts have been reporting that with taper expectations already priced into the Dollar, the Greenback’s gains may be capped for now. However, further global policy clues could come from a different direction in today’s Jackson Hole meeting, although Fed Chief Ben Bernanke won’t be in attendance as neither will Mark Carney nor Mario Draghi.

US new-home sales are out today in the afternoon, with a drop to a seasonally adjusted level of 485,000 in July – down from 497,000 in June.

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Written by Tom Tong

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