UK Shows Broad-based Recovery

The recent spate of buoyant UK economic data continues, with data just out revealing an unexpected improvement in the domestic services sector for August. With the latest PMI data offering further evidence of strong growth, tomorrow’s BoE policy meeting is likely to be a low key affair, with the central bank expected to leave its policy measures untouched. Across the Atlantic, the Beige Book survey today and Friday’s non-farm payrolls data will be closely scrutinised for gauging the Fed’s next policy move given yesterday’s manufacturing activity data confirming signs of revival. Additionally, tomorrow’s central bank meetings in the Euro zone and Japan will be keenly watched.

Pound Sterling – UK Markets

Yesterday’s better than expected UK construction PMI data momentarily lifted the Pound against the US Dollar, further validating the recent strength witnessed in the economy. The OECD also raised its 2013 UK economic growth forecast, citing encouraging first quarter GDP numbers, falling unemployment and a strong recovery in the manufacturing sector. However, for the second consecutive day, Sterling failed to cling on to its early gains and moved lower against the greenback on expectations that the Fed might scale back its stimulus measures later this month following better than forecast US manufacturing PMI for August. Data just out has indicated that services PMI in Britain unexpectedly improved for August, with the pace of expansion in the dominant sector remaining fairly robust. This has elevated hopes of an accelerated UK economic recovery for the third quarter. Additionally, price pressures appear to be contained, as the BRC reported that shop prices in the UK declined for the fourth straight month for August. Against the backdrop of the improved domestic economic environment, the BoE policy meeting tomorrow will be closely followed for further cues on the central bank’s next policy move.

US Dollar – US Markets

Visible signs of improvement in the US manufacturing activity stoked speculation that the Fed might soon taper its bond purchases programme, providing relief to the US Dollar against the majors yesterday. The OECD also endorsed the Fed plan to gradually scale back its stimulus measures while keeping interest rates extremely low. Moreover, there were signs of increased geo-political risks after the US President won support from two key opposition leaders in his call for limited strikes on Syria. In today’s trading session, the greenback is trading in a fairly tight range against the Euro following a string of mixed European services PMI releases. Investors are looking ahead to the Fed’s Beige Book survey later today which will provide early insights about the US economic growth for the third quarter. Any positive assessment of the economy could prove counter-productive for high yield currencies, as it will further strengthen the case for QE3 tapering. The US trade balance data also features on today’s economic calendar and is expected to show a wider deficit for July after a significant improvement posted in the previous month. Additionally, comments from few Fed officials and ongoing events in Syria are expected to influence market sentiment.

Euro – European Markets

The common currency traded broadly lower, although in a tight range against the US Dollar yesterday, as a relative lack of Euro zone economic releases and the rising possibility of a potential US military attack on Syria limited the upside of the Euro. Market speculation of the Fed partially withdrawing its asset purchases later this month also gathered steam following better than expected US manufacturing data yesterday. Meanwhile, producer prices in the Euro zone rose for the first time in five months, indicating that the recent economic recovery is adding to inflationary pressures in the region’s economy. The OECD, too, while acknowledging the recent economic recovery, raised its economic growth forecast for the Euro zone economies. The single currency continues to look for direction against the US Dollar this morning following a mixed bag of services PMIs across the Euro zone earlier today. Market participants are looking forward to the Euro zone retail sales and the revised second quarter GDP data later today for further direction and any positive surprises on either front is likely to keep the Euro supported in today’s trading session.

Other Currencies – Highlights

The Australian Dollar has continued its recent upward momentum against its US counterpart in today’s trading session after the nation’s economic growth for the second quarter exceeded market estimates, as a recovery in the housing sector and the weaker currency eased pressure on the economy. The Aussie Dollar had strengthened against the majors yesterday after the Reserve Bank of Australia kept its interest rates steady as the recent rate cuts work their way through the economy in the form of a pickup in the housing industry. The recent upbeat Chinese data also boosted the Australian Dollar against its peers. However, a poor show from the Australian services and retail sector implied that more needs to be done to sustain growth in the economy. With no major domestic economic indicators later today, news flows emanating from Europe and the US will help in determining the direction of the Aussie Dollar. Going ahead, tomorrow’s domestic trade balance data and a string of important economic events from both sides of the Atlantic will be eyed for further direction to risk appetite.