UK Economy Strong despite Hurdles

The UK economic recovery remains firmly in the positive territory despite macro data lately suggesting a moderate slowdown in growth. However, today’s PMI data defied recent trend and confirmed that the UK’s services sector continues to expand at a faster pace. However, with recent economic releases showing signs of headwinds, the performance of the overall economy, until the end of the year, will have a profound influence on the UK’s fiscal and monetary policies. On the international front, the US continues to search for concrete evidence of sustained growth before tapering QE3. Meanwhile, in the midst of mixed economic data from the Euro zone the central bank’s policymakers are likely to stay watchful and maintain a dovish stance in the upcoming monetary policy meeting.

Pound Sterling – UK Markets

Sterling is trading higher against the majors this morning after data just out showed a further rise in the UK’s dominant services PMI numbers for October, with service sector activity at a multi-year high. Earlier today, the BRC report on retail sales revealed a marginal pickup in consumer spending for October, but a drop in clothing sales due to mild weather conditions limited overall gains. The Pound maintained its gains against the US Dollar while it traded mostly range bound against the common currency yesterday, largely supported by upbeat construction PMI data from the UK. Complementing the buoyant mood prevalent in the UK housing sector, the construction PMI for October beat market estimates and climbed to the highest level since September 2007. However, the upside in Sterling was capped following the release of a positive US factory orders report later in the day. With a relatively light global economic calendar, the US ISM non-manufacturing PMI report later today will be closely watched for further direction to risk appetite.

US Dollar – US Markets

The greenback traded in a tight range against the majors yesterday as traders searched for direction amid a lack of decisive economic data. Meanwhile, Fed officials continue to reiterate that the central bank’s loose monetary policy is here to stay for the foreseeable future until further improvements are visible in the nation’s economic and labour market conditions. Although the much delayed US factory orders reports for August and September showed a promising rise, much of the September gains stemmed primarily from a large jump in demand for commercial aircrafts, while demand for capital goods such as machinery and electronics declined, offering hints of a dent in business sentiment following last month’s government shutdown. The US Dollar has continued to trade under pressure against the majors in today’s trading session, ahead of the ISM non-manufacturing report for October later today. Following the upbeat US manufacturing data last week, investors will keenly eye today’s services report and a positive surprise on this front will lift hopes of a swift economic recovery and could support the US Dollar against the majors in the near term.

Euro – European Markets

The common currency registered modest gains against the US Dollar yesterday following the upbeat investor sentiment print for November, which climbed to the highest level since May 2011. However, yesterday’s manufacturing PMIs for the Euro zone offered a largely mixed picture. While the German manufacturing PMI improved, manufacturing activity in France and Italy unexpectedly slowed down for October. Against the backdrop of the recent mixed economic data, especially the latest inflation numbers, the ECB’s policy stance in its meeting this week will be closely scrutinised by investors for further direction. Meanwhile, the common currency has moved lower against the US Dollar in today’s trading session as traders remain cautious ahead of the ECB President, Mario Draghi’s speech later today. Additionally, the Euro zone producer price report today will offer insights into the inflationary pressures faced by industries in the currency bloc. Furthermore, the US ISM non-manufacturing numbers later today will influence investors in the Euro-US Dollar pair.

Other Currencies – Highlights

In the run up to the Bank of Japan Governor, Haruhiko Kuroda’s speech this morning, the Japanese Yen strengthened against the majors and has maintained its gains after the Japanese central bank chief reinforced his pledge to end deflation and attain 2% inflation by 2015. Kuroda further stated that in order to achieve its price stability target, the central bank will make necessary adjustments to monetary policy without any hesitation. Market participants are looking forward to today’s overnight release of the Bank of Japan’s latest policy meeting minutes for insights into policymakers’ outlook towards the economy. Additionally, investors will keep a tab on news flows emanating from both sides of the Atlantic, especially the official US services PMI print later today, for further direction.