UK Manufacturing PMI Deteriorates

Data just out indicated that domestic manufacturing activity slowed for August, thereby knocking expectations of a steady recovery in the sector. Meanwhile, market attention has now shifted to this week’s construction and services activity reports to gauge the state of revival in the nation. Additionally, data revealed that the number of mortgage approvals dropped for July. With mostly disappointing economic reports across Europe and continued geopolitical tensions in Eastern Europe denting prospects of a recovery in the Euro bloc, it remains to be seen if the ECB resorts to additional stimulus in its policy meeting scheduled later this week. Across the Atlantic, encouraging US macro data released recently has strengthened prospects of a rate hike.

Pound Sterling – UK Markets

Data just released showed that UK manufacturing activity eased unexpectedly for August, although it continued to remain in the expansion phase. Market focus has now shifted to this week’s construction and the most crucial services PMI data to ascertain the exact state of recovery in the nation, especially considering last week’s upbeat assessment of the UK economy from the BCC. Additionally, a separate official report indicated that the number of mortgage approvals dropped for July, thereby pointing towards uncertainty in the housing market. Against this backdrop, this week’s BoE policy meeting might not generate significant interest as the central bank is unlikely to alter its current policy stance despite two of its policymakers dissenting in the last meeting. Despite weak manufacturing data, the Pound has shown little reaction against its major counterparts this morning. On Friday, Sterling advanced against the US Dollar following upbeat domestic consumer confidence report and Nationwide house prices data. However, the Pound later capped its gains against the US Dollar following mostly positive economic data in the US.

US Dollar – US Markets

The US Dollar advanced against the Euro on Friday as mostly upbeat US macroeconomic data bolstered expectations that the US economy continues to recover at a steady pace. The Reuters/Michigan consumer confidence report showed an unexpected improvement for August, mainly helped by positive labour market conditions. Furthermore, manufacturing activity in Chicago rose more than expected for August, on the back of a rise in production and new orders. With US markets closed today on account of a holiday and lack of crucial economic data across the globe, trading in currency markets is likely to remain subdued during the second half of the session. However, investors will keep a close watch on events unfolding in Eastern Europe, especially after the European Union leaders gave Russia a week to scale back its intervention in Ukraine or face another round of sanctions. Additionally, US non-farm payrolls report scheduled later this week will be keenly eyed, particularly in the wake of comments from the Fed Chief where she indicated that a continuous improvement in the labour market might trigger an earlier than expected rate hike.

Euro – European Markets

Data released earlier today confirmed that the German GDP contracted for the second quarter of 2014, the first time since the fourth quarter of 2012. A contraction in the German economy along with stalled economic growth in the common currency bloc has stoked concerns among investors that the region is facing fresh headwinds from geopolitical tensions in Eastern Europe. Additionally, manufacturing PMI readings across the Euro zone showed that manufacturing activity across most of the key European nations slowed for August. Moreover, with prospects of more sanctions by EU leaders on Russia for its recent incursion in Ukraine, the Euro is expected to remain under pressure against the majors. The common currency lost ground against the greenback in Friday’s trading session following the release of the Reuters/Michigan survey which showed an unexpected rise in consumer morale in the US. Additionally, data showed that consumer price inflation in Euro zone eased further for August. This has strengthened speculation that the ECB might consider another round of unconventional stimulus measures in its policy meeting scheduled this week.

Other Currencies – Highlights

The Japanese Yen lost ground against the greenback in Friday’s trading session following the release of soft Japanese economic data including unemployment, industrial production, household spending and housing starts. Additionally, the US Dollar-Japanese Yen pair crossed the 104.0 mark after the Reuters/Michigan report indicated an unexpected improvement in consumer morale in the US. Meanwhile, data released earlier today indicated that the final manufacturing PMI in Japan missed the preliminary estimate for August, however, growth in the pace of manufacturing activity was the strongest since the April sales tax hike. This has strengthened prospects that the negative impact of higher sales tax on the domestic consumer spending could be fading away, limiting losses in the Japanese Yen. Additionally, the safe haven demand among investors due to geopolitical tensions in Eastern Europe is expected to keep the Japanese Yen supported against the majors. Going forward, the Bank of Japan’s policy meeting due this week will prove crucial in providing further direction to the Japanese Yen against the majors.