Strong ADP numbers buoy USD. EUR gains on lower than called inflation.

Tom Tong05/Dec/2013Currency Updates

GBP

London closed with the pound down against both the dollar and euro. Losses stemmed from strong ADP payrolls out of the US and a slight slip in UK service sector PMI. It’s vital to realise the slip is totally relative to previous high. Last services PMI came in at highs not seen since ’97. Thus it was unlikely this could be beaten. Accordingly, the fall was minimal with PMI coming in at 60 from previous highs of 62.5. Service sector PMI is a vital stethoscope for the pulse of UK recovery as the sector comprises 3/4 of total GDP. The latest reading continues to signal very strong growth and should mean UK growth for the last quarter of this year comes in at 1%.

Despite today’s dark and freezing morning in London, George Osborne will doubtless wake up basking in the light and heat of today’s Autumn statement. Although austerity is not yet over the Chancellor has done a sterling job to dodge a slowdown and trigger wider economic growth. The statement is widely expected to focus on the fact that a budget surplus is now achievable for the first time this millennium. The Chancellor steps onto the stage as the spotlight is scoped on the sharply rising UK growth forecasts, which could lead to a bigger reduction in net borrowing and tax cuts. However, Osborne will also draw attention to the fact that there is still much work to do to ensure that the recovery is responsible and fiscal and monetary policy is not altered prematurely.

The Office of Budget Responsibility view on growth holds a parallel to the market view on UK growth. The Office of Budget Responsibility is today expected to revise upward growth forecasts for 2013 from 0.6 – 1.5%. Likewise the way is up for next year with a revision of 1.8% – 2.5%.

Today will bring the Autumn statement and BOE interest rate decision.

EUR

Perversely the euro closed up against both the euro and dollar yesterday. Eurozone services PMI again dipped. However, a surprisingly minor rise in inflation minimised the chances of the ECB further cutting rates, hence the Euro strength as the market had widely expected a far bigger jump in inflation which would have surely led to further ECB intervention this year. The ECB meets in Frankfurt today. ECB action will handcuffed to the latest quarterly forecasts. Draghi as ever is expected to be dovish, he will look to emphasis the need to stay calm and that although minimal, the eurozone is still able to scrape out minor levels of growth. He will also want to prime the market to the reality that if things progress to get worse the ECB will not hesitate to act. Nobody will second guess the conviction of this sentiment as the ECB rate cut took almost everyone by surprise.

Eurozone service sector PMI slowed yesterday with the lowest reading since August. PMI hit 51.2, below the previous 51.6. Activity was solid in Germany with growth also in Ireland and Spain. However, worryingly France – Europe’s second largest economy, posted its worse figures in 5 years. Doubtless there will be plenty of raised eyebrows at the ECB today as they continue to battle with the huge wedge between the larger economies and the struggling nations.

The ECB meeting in Frankfurt will bring MPC statement and interest rate decision. No change is expected with the market simply too fragile to handle such a measure.

USD

The greenback scalped gains against the pound yesterday. However, it dipped against the euro following slight euro gains across the board. With ADP out yesterday it was very much the prelude for tomorrow’s Non-Farm Payroll.

We saw a surge in ADP employment numbers, however it is debatable as to whether these figures will be mirrored by Non-Farm Payroll tomorrow. The new homes market remains under pressure despite the recorded jump in October sales. Q3 growth is surely set for a hefty upward revision today, equally across the market this is widely expected.

Yesterday’s ADP report came in at 215k – massively above market calls of the 180k mark. The strong numbers will increase chatter over the likely Non-Farm Payroll numbers. However, the ADP numbers rarely run in a proper tandem to Non-Farm Payroll, so most in the market remain unwilling to enter into sizable positions prior to tomorrows numbers. Very much the calm before the storm.

Data of note out of the US today includes – GDP and initial jobless claims.

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Written by Tom Tong

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