Another weak day for USD as the US government is still far from reaching a decision on the debt ceiling

Tom Tong04/Oct/2013Currency Updates

GBP

Sterling saw a mixed day of trading yesterday. Against the euro, the pound lost ground as improved economic data lifted the common currency. Equally, investors looked to offload the pound at high levels despite strong service sector data that pointed to robust growth.

The pound also lost ground against the dollar with traders choosing to close positions against the dollar with growing market chatter leaning towards a final rally or pullback as the current highs are seen as unsustainable. The minority feel we could see further gains as strong economic data points to consistent growth for the U.K economy. Fundamentally significant movement in either direction hinges on development in the US government shutdown.

The Purchase Managers Index measuring UK service sector growth decreased to 60.5 although it still did beat market consensus of 60.0 bouncing off to a 16-month highs. Ensuing data releases will be avidly watched and critical to sterling performance. The pound has gained around 5% on a trade weighted basis over the past 2 months and is therefore fragile to any surprising data that opposes the general view that the UK economy is enjoying a healthy recovery. Driving factors over next week will stem entirely from the US debt ceiling crisis and macro data out of the UK. A prolonged search for a resolution in the US, coupled with strong UK data should result in further sterling gains. As sterling has risen at such a quick and unprecedented rate, technical resistance levels are playing a bigger role than typically seen in intraday trading with many viewing the currency with a “sink or swim” mentality.

Data release of note today will be new car registrations and Lloyds employment confidence.

EUR

Yesterday’s trading session saw another strong day for the euro against the USD as the euro now floats back to February highs against the greenback. Higher than anticipated retail sales, a jump in the eurozone services sector and political stabilisation in Italy all chipped in to produce the bullish sentiment.

There were noises prior to Wednesdays interest rate decision that Draghi may elect to reduce the ECB stimulus to the Eurozone. At present the ECB is pumping ultra cheap loans to European banks to fuel borrowing and therefore stimulate growth. Cheap money supply is a quick fix solution, although economic growth will be forthcoming in the short to medium term. The long term concern is that sustained QE will pollute organic growth, distort market data and perhaps most importantly make it less attractive to hold the currency. However at the ECB press conference on Wednesday Draghi displayed minimal concern which led to the strengthening of the common currency.

Similar to Sterling further Euro trading will hinge on macro data out of the Eurozone and developments in the U.S government shutdown. Data releases of note in the eurozone today include eurozone Producer Price Index and German producer prices.

USD

The greenback fell consecutively for the 5th trading session against a basket of the most traded currencies. Naturally, the fall was as a result from increasing concerns over the impact of the US government partial shutdown.

The closer we creep to October 17th the jumpier investors are getting. The 17th is the date the government estimates it will be unable to pay its debts, thus morphing a debt ceiling crisis into a debt default crisis which is a far more serious and truly disastrous situation. The U.S is the king of debt with 19 cents of every dollar printed directly go to paying debts. The debt ceiling is currently at 16.7 trillion which on a GDP ratio is higher than most of the Western world. The longer this drags on the bigger negative impact on economic activity.

It is entirely possible that a continuing crisis will have a knock on effect for QE, which is integral to the U.S recovery. The FED’s spectacular monthly program of buying 85bn of U.S treasuries and mortgage backed securities will continue to stalk the dollar. Conversely, whilst the crisis is ongoing the FED will be unwilling to alter a controversial monetary policy. Essentially the market is still mystified by what the direct result of a taper of QE will be.

The dollar punched back against the pound with increasing market chatter that the pound’s incredible rise is simply unsustainable and will end in tears. The minority of traders feel if future data is strong we will see further strength. However the majority of funds and investment banks disagree and are taking short positions.

Encouraging data out of the eurozone saw the dollar sustain further losses, with the euro continuing to flutter around 8-month highs against the dollar.

No data releases of note out of the US today although we have various FED members talking publicly.

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Written by Tom Tong

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