Solid PMI fuels GBP gains, EUR down on ECB speculation.

Tom Tong06/Nov/2013Currency Updates

GBP

Spectacular performance from sterling yesterday. The release of services PMI and growth forecasts proved a potent duo and catapulted sterling to notable gains against both the euro and the US dollar and also rising against its most traded pairs. Right now the carousel of positive UK data is back in full flow, surprising the market and silencing noises that the recovery may be at risk of a slowdown. The question now is what are the key growth drivers of the economy. More importantly what does this mean for BOE policy and is a rate change now likely.

The data saw the pound flipping recent loses against the euro and hitting a monthly high. Sterling also sidestepped last weeks losses and climbed higher against the greenback. Put simply last month’s sterling lows were fueled by an unexpected dip in UK macro data and concerns that a slowdown in the US would have an adverse effect on U.K growth. Furthermore, solid Euro data caused Sterling to suffer. For the meantime it would appear that UK growth is rosy. Lately US data has been unspectacular and the eurozone is slipping. Presently, sterling should stay relatively well supported.

The rise kicked off early into the London trading session with eyes peeled on the release of UK PMI for the service industry. Naturally, PMI is always closely followed, however, more so when it is for the service industry as this is the strongest sector of the UK economy and therefore a mirror for wider economic performance. PMI was forecasted at the 59 mark but it roared in at 62.5, meaning growth within the sector is at its highest in 16 years. Following this release, the EU more than doubled U.K growth forecasts for this year and 1.3% growth is now widely expected. The forecast also altered projections for U.K unemployment, with the rate anticipated to fall to 7.3% in 2015, down from 7.9% called earlier this year. Presently the U.K seems to be the bookies favourite and market sentiment is widely bullish with a positive view on long term growth. Naturally, yesterday’s events sparked chatter on BOE monetary policy and the possibility of a change in rates. Next week the BOE is due to release its inflation report, this will encompass growth and unemployment forecasts thus shedding light on the thoughts amongst the BOE.

Data releases of note out of the U.K today include – Shop Price Index, Industrial Production and Manufacturing Production.

EUR

Initially, a poor show from the euro yesterday. Overall gains from last week’s spectacular rally remain, however, market sentiment is now slightly different towards eurozone growth prospects. London trading session saw the euro down against the pound and duly hitting a monthly low. It also flirted with a fortnightly low against the dollar and a whisker from a monthly low against the yen. The euro basket was in tatters as it was down against most pairs. However, things picked up overnight. Asian trading saw the euro regain losses as the stock market rose thus countering risk sentiment and pushing up the currency.

Euro lows spun off heightening concerns that the ECB will alter monetary policy, or even cut interest rates at next week’s meeting to counter the very real risk of deflation. Further movement is likely to stem from the actions of the ECB, even if nothing changes the very tone and comments made could be significant. We have a 50/50 view on whether next week will see any monetary policy alteration, if not next week, heads will turn to December which will be the next chance for the ECB to either indicate or initiate change.

Disappointing data out of the eurozone yesterday saw PMI drop lower than expected and growth forecasts for the Eurozone have been cut as market demand has not hit expected levels. The European Commission maintains the economy will shrink 0.4% this year, however minor growth is expected for next year. Fundamentally, market focus lies with the ECB meeting next week and how that unfolds.

Important data releases out of the eurozone today include Services PMI and Retail sales.

USD

Positive data out of the US yesterday saw the greenback strengthen against the euro and experience some gains against its most traded basket. Solid UK data meant suffering against the pound but overnight we have seen a slight correction with a drift back towards typical trading levels. Yesterday saw the release of U.S Redbook chain store sales and ISM non manufacturing data. US chain store sales grew at a faster pace of 3.8% YoY, compared to the previous reading of 3.6%. Service sector activity also grew at a faster pace than expected, easing concerns over the wider economic outlook. Non-manufacturing PMI rose to 55.4 compared to 54.4 in September. This data also shows that the immediate effects of the partial shutdown to the economy have been minimal. The data also swings against expectations with all of yesterday’s data expected flat or down. All in all encouraging for the U.S recovery.

Conversely, the strength could strengthen the case for the FED to begin scaling back monetary policy and initiating a taper. Speculation will continue throughout this month with all hinging on next month’s FED meeting.

Data releases of note out of the U.S today include – Mortgage Applications and Job Cuts.

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Written by Tom Tong

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