Muted Response to British Services Activity Data

In line with yesterday’s construction PMI report, data just released indicated that activity in the crucial services sector accelerated unexpectedly last month. However, the Pound has shown little reaction to the upbeat economic data as traders continue to mull over a poll survey released yesterday which showed increased support for Scottish independence ahead of the referendum scheduled later this month. Meanwhile, in the wake of mixed economic data in the UK and ongoing crisis in Eastern Europe, the BoE looks set to keep the key interest rate at record low levels for a considerable time when it announces the decision at its policy meeting tomorrow. Across the Atlantic, the prospects of continued recovery has strengthened following yesterday’s upbeat ISM manufacturing activity report.

Pound Sterling – UK Markets

The reaction in the Pound against the majors to the upbeat services PMI report has been muted this morning. Data just released indicated that activity in Britain’s dominant services sector surprisingly improved for August. This week’s broadly mixed PMI data has confounded traders over the performance of the economy during the third quarter, especially after repeated comments from BoE officials that inconsistency in the nation’s economic data could delay the case of an early hike in interest rates. With the nation’s recovery showing signs of slight moderation as evident by the recent mixed macro data, investors will keep a close watch on the outcome of the BoE policy meeting tomorrow to gauge the amount of slack in the economy and a probable debate over the timeline for an interest rate hike. Yesterday, the Pound traded lower against the majors despite data showing that the pace of construction sector activity in the UK improved surprisingly to a seven month high for August. In a noteworthy development, a poll revealed increased support for Scottish independence ahead of the referendum on 18 September 2014.

US Dollar – US Markets

The greenback is trading in a tight range against the Euro this morning ahead of the release of US factory orders data which is expected to show that growth reached a multi-year high for July due to strong rise in new aircraft orders. Moreover, with mixed signals from the minutes of the latest Fed policy meeting, today’s release of the central bank’s Beige Book survey will be keenly scrutinised to gauge the health of the US economy and a probable hint on the timing of an interest rate hike. The US Dollar rose against the Pound yesterday following upbeat US ISM manufacturing report for August. Data showed that the manufacturing activity rose unexpectedly to its highest level since April 2011, suggesting that US industrial activity is regaining its pre-crisis momentum. However, later this week the ISM is anticipated to report a slowdown in services sector activity for August. This might keep investors confounded until the official jobs data is released on Friday for an overall view on the economy. Additionally, US construction spending figures showed a sharp rebound for July, raising hopes that the economy could get an additional boost from the construction sector during the second half of this year.

Euro – European Markets

The Euro is trading in a tight range against the Pound this morning. Data out today revealed that the final service PMI readings across core Euro zone nations eased more than the preliminary estimate for August. With deterioration in the region’s services and manufacturing sector activity, market concerns have heightened that the Euro zone is no longer immune to the persistent tensions in Eastern Europe. Additionally, markets will keep an eye on today’s retail sales numbers in the Euro zone which is expected to register a decline for July. Markets do not expect any significant movement in the Euro unless the numbers miss expectations by a sizable margin. Most of market attention is focused on the ECB policy meeting scheduled tomorrow to ascertain whether officials decide to add more stimulus to the economy. In yesterday’s volatile trading session, the common currency was range bound against the greenback despite data showing an improvement in US manufacturing sector activity. Additionally, uncertainty surrounding the prospects of new EU sanctions against Russia for its military activity in Ukraine kept a tight lid on the Euro against the majors.

Other Currencies – Highlights

The Swiss Franc was range bound against the greenback in yesterday’s trading session despite data showing that economic growth in Switzerland stalled unexpectedly for the second quarter. This was mainly due to a slowdown in export growth and a fall in domestic construction spending. Additionally, Swiss manufacturing PMI released earlier this week showed that the pace of activity slowed more than expected for August. With Swiss manufacturing and exports showing signs of weakness, market speculation has heightened that the crisis in Eastern Europe and a fragile recovery in the common currency bloc might continue to weigh on the Swiss economy. With little on the domestic macroeconomic front today, investors will keep an eye on Friday’s industrial production data for the second quarter to get a clearer view on the economy. Additionally, this week’s official US labour market report and the Swiss unemployment and consumer inflation data scheduled next week is expected to provide further direction to the Swiss Franc against the greenback.