Sterling gains after strong construction data. Euro fairly flat

Tom Tong05/Feb/2014Currency Updates

GBP

Chin up for the pound yesterday. Sterling uppercutted against both the greenback and Euro. The bounce was needed after Monday saw Sterling on the ropes against both the Euro and Dollar. London closed with the pound punching up against it’s most traded pairs following a rally in the morning following pleasing UK data.

The upside pivot stemmed from construction data coming in as safe as houses. The measure of new buildings in the UK rose as it’s fastest pace since August ’07, clearly indicating that the recovery is still in elevation. Right now builders cant mix the cement quickly enough with houses and offices being knocked up all over the country. A glance over the city or home counties is greeted with a surging forest of glass and steel, a pleasing sight following the savage construction slowdown during the recession.

The outlook is timely following Monday’s positive manufacturing report. Presently the market outlook is incredibly positive for the UK economy, with most investors bullish.

Spotlight on the old lady on Thursday with the BoE IR decision; ice cool Carney will doubtless make no changes, while NFP on Friday could lead to some Sterling swings.

Data today includes Markit PMI for the services sector – the street expects a big number, which should lend intraday support to the pound.

EUR

The Euro was caught slipping yesterday, dipping against both Sterling and the Dollar, however the real damage was done against the Yen with the Euro sliding to a 10 week low.

Chatter over the past week has naturally focused on the ECB. There are a growing number of investors who feel the ECB will inevitably reinforce its commitment to lower rates. Tomorrow will likely see no change, however even if there is no additional step to alter policy it will surely continue to signal it’s dovish stance to the market.

The ECB will likely hold the benchmark interest rate at 0.25% as it continues to face the threat of deflation. A Bloomberg survey yesterday confirmed this view with most economists in agreement that any change would be too soon.

Strong trading over Christmas saw the Euro catapulted to highs against both Sterling and the greenback, and we are now beginning to see a minor readjustment as the market prices in the improving data coming out of the Eurozone.

On the flip side, Spanish unemployment data yesterday was not particularly encouraging. Figures showed that unemployment rose by 113k for January as temp jobs over Christmas ended. Right now Spain’s unemployment level is sat at 26% with 6 million out of work; this is the second highest for the EU with only Greece in a more shaky state. However a yearly view shows that employment is rising, encouraging investors to take on risk and invest in European shares, which has lent the currency support.

Big data out of the EU today with Markit services PMI and Retail sales, both of which will be watched closely.

USD

Surprisingly poor US data did little to move the Dollar yesterday. Trading against the Euro was sideways for most of the day, closing the London session pretty much flat against the Euro. Sterling gained ground against the Dollar with strong UK construction data contrasting to poor data out of the U.S.

The Redbook index saw a monthly dip for January of 0.2%. However the dip was expected as naturally the figures peak over the festive period. 2013 saw the index expand 2.7%, showing Americans are again starting to splash the cash. Ultimately the Redbook index is seen as fairly unreliable and the release did not really affect the Dollar. More important were U.S factory orders.

Factory orders in the US suffered their steepest fall for 33 years in January, raising a few eyebrows. Its unclear if the release can be blamed on the polar storms and the release made investors a little jumpy and saw the Dollar dip. The domino effect saw US treasuries fall to a three month low, while the Dow also took a hit to the tune of 326 points.

Key Play for this week remains Friday NFP. Data of note today includes- Services PMI and ISM non manufacturing PMI.

RoW

An rally in Asian markets yesterday saw the Japanese Nikkei 225 and Hong Kong Hang Seng indices climb 2%, although compared to drops of 4.2% and 2.9% respectively on Tuesday the rally is modest. The Japanese currency got a lift from the equities market, picking up 0.2% this morning.

The rebound was felt across markets yesterday, with currencies that bore the brunt of the sell off in recent weeks, the Turkish lira, South African Rand and Hungarian Forint, all seeing gains between 1.5% and 2%. Australia however couldn’t take advantage of the global sentiment, with stock markets dropping half a percent. The currency also softened, but it was recently bloated by Mondays central bank announcement.

While last nights rally is encouraging, the cloud of continuous tapering from the Fed and other central banks will likely hang over emerging markets for the foreseeable future.

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Written by Tom Tong

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