Three Cheers for Services

High yield currencies outperformed on Friday after a dismal US non-farm payrolls report watered down speculation of the US Fed altering its policy stance sooner than envisaged. Across Europe, services PMI data out today has confirmed that the region is slowly on the mend, shifting focus towards the Euro zone retail sales data later today for further insights on this front. The US services PMI is also expected to hold market interest in today’s trading session. In the UK, the rub of the green has continued, as data just out has revealed that services activity improved further for July. This week’s quarterly inflation report will hold market attention for further insights into future policy moves.

Pound Sterling – UK Markets

On Friday, the Pound leapt above the 1.52 mark against the US Dollar as a downbeat US non-farm payrolls report added credence to arguments that the US Fed might continue with its easy monetary policy measures in the near future. Meanwhile, the recent string of upbeat UK economic data has sparked optimism that the recovery is becoming entrenched. In line with manufacturing and construction reports released last week, data just out has revealed that the dominant services sector of the UK economy expanded more than expected for July, leading the Pound to trade firmer against the majors. Meanwhile, in the aftermath of burgeoning consumer confidence and heavy discounts by retailers, today’s BRC data is likely to reveal a further improvement in retail numbers for July. With no major economic releases apart from the BRC report today, markets are expected to set their sights on industrial production data tomorrow, especially after last month’s release revealed an unexpected decline. The NIESR GDP estimate, the BoE inflation report and trade balance data remain the other key events that will attract market attention during this weekly session.

US Dollar – US Markets

The long awaited non-farm payrolls data suggested that the labour market is yet to tread a sustainable path, as hiring for July was below market estimates and figures for June and May were also revised lower. This led the US Dollar to slide sharply against high yield currencies in Friday’s trading session, as the dismal jobs report supported market belief that the US Fed might continue with QE3 for a longer than anticipated period. With the US economy seemingly still not out of the woods, the St. Louis Fed Chief, James Bullard, opined that the central bank should wait for further evidence before scaling back its massive bond buying programme. However, the unemployment rate dropped to 7.4% for July, more than market expectations and closer to the Fed’s threshold level. In today’s trading session, the US Dollar has moved marginally lower against the single currency after data revealed an improvement in services PMI across most of the major European economies for July. This is in sync with the upbeat Chinese services data released over the weekend and has indeed turned market focus towards the US services PMI data, due later today, for further insights into prospects for the global economy.

Euro – European Markets

The Euro staged a recovery against the US Dollar and nudged above the crucial 1.32 mark in Friday’s trading session after disappointing US non-farm payrolls data offered a fillip to high yield currencies. The situation in Europe also looks bright, as the economy is finally showing some signs of recovery from its prolonged recession following last week’s upbeat manufacturing and labour market data. Today’s upbeat services PMI and Sentix investor confidence data adds to the optimism and further indicates that the economy is beginning to find its feet after stuttering for the past few years. However, investors remain cautious, as the Euro zone retail sales data later today is expected to show a decline for July. Markets are also expected to keep a tab on the Italian GDP and German factory orders data due tomorrow for further insights. In the absence of major economic releases, apart from retail sales today, news flows emanating from the US will act as a catalyst for the near term dynamics of the single currency against the majors.

Other Currencies – Highlights

Although waning speculation of the US Fed scaling back its stimulus measures sooner than expected helped the Australian Dollar to nudge higher against the greenback on Friday, the currency has erased most of its gains after dismal services PMI and retail sales data in Australia augmented the case for additional measures from the Reserve Bank of Australia. Data revealed that the nation’s services activity moved further into contraction territory for July, while retail sales were lacklustre for June. Against the backdrop of tepid economic activity and a fading mining boom, the Reserve Bank of Australia is likely to lower its key interest rate in its monetary policy meeting tomorrow. Going forward this week, the unemployment and trade balance data also features among the other key economic releases and will provide further insights into the strength of the Australian economy. Apart from the domestic releases, developments taking place in overseas markets, especially a raft of macro data in China during this week holds significance in determining the direction of the Aussie Dollar against the majors.