Robust GDP, Euro Worries to Drive Sterling Higher?

A robust reading on the third quarter Gross Domestic Product (GDP) is expected to drive the Pound higher against the Euro. Meanwhile, the official Chinese manufacturing Purchasing Managers’ Index (PMI), released this morning, was below expectations, leading to investor worries about the global economic recovery, resulting in higher risk aversion. The market is also looking forward to the two-day Group of 20 (G20) summit this week, which starts on 3 November 2011, where the G20 members are likely to press for more details of the plan agreed last week to tackle Eurozone’s debt crisis. We believe that persistent pessimism in the Eurozone, further elevated by Greek Prime Minister’s pledge to hold a referendum, may work to the benefit of Sterling in the near term against the Euro.

Pound Sterling – UK Markets

The Pound is trading higher against the Euro, this morning, amid growing concerns that European leaders will struggle to find funding to contain the region’s debt crisis. Adding to the optimism towards the Pound against the Euro, the UK third quarter GDP rose 0.5% sequentially, ahead of market expectations, following an anemic 0.1% growth recorded in the previous quarter. Data from Nationwide Building Society has been positive this morning, but the agency has warned that house price growth will likely remain soft in the period ahead. Meanwhile, the manufacturing PMI was weak, declining to 47.4 in October from 51.1 posted in September. We expect the Pound to trade higher against the Euro in the next few trading sessions, on continuing concerns about European crisis.

US Dollar – US Markets

The US Dollar has retained its strength against Sterling and the Euro, this morning, aided by heightened risk aversion amongst traders. Ongoing uncertainty engulfing the outcome of the upcoming G20 summit in Cannes and the European Central Bank (ECB) rate setting meeting has dented investor sentiment and prompted traders to move towards safe haven assets. Additionally, downbeat Chinese manufacturing data has spurred concerns over a slowdown in the nation’s economy, further weighing on investors’ risk appetite. Key economic data scheduled for release today is the October ISM manufacturing index, which is expected to indicate an expansion in manufacturing activity. The US Dollar is likely to trade higher against Sterling and the Euro in the near term, amid wavering investor confidence, while further direction would likely be determined by cues from the FOMC rate decision tomorrow and the non-farm payroll data later in the week.

Euro – European Markets

The Euro is trading weaker against Sterling and the US Dollar, this morning, amid market speculation that the ECB may consider lowering its interest rate in the meeting scheduled on Thursday. Concerns over the region’s debt woes further worsened, after the Greek Prime Minister, George Papandreou, pledged to hold a referendum on the European Union’s latest bailout plan for the nation, days before G20 leaders meeting scheduled later this week. Economic releases taking center stage today include German and the Eurozone manufacturing PMI, which are expected to show a contraction. We expect that the ongoing uncertainty over the Eurozone’s rescue package implementation would weigh on the Euro against Sterling and the US Dollar in the short term.

Other Currencies – Highlights

The Aussie Dollar has weakened against the major counterparts, this morning, after the Reserve Bank of Australia (RBA) lowered its benchmark interest rate by 25 basis points to 4.5%, marking the first interest rate cut since April 2009. However, the RBA’s policy action was largely in line with market expectations. Meanwhile, concerns over Chinese manufacturing growth too weighed on the Aussie Dollar, with the official Chinese manufacturing PMI recording its lowest reading since February 2009. Economic reports released today in Australia were mixed, and had little impact on the Aussie Dollar. Data showed an improvement in manufacturing activity in October, while the house price index registered a decline in the third quarter. We expect the Aussie Dollar to trade lower against the major currencies in the near term.