Data from the European session was light yesterday but the one major release of the morning reflected the continued strengthening of the UK economy. Construction PMI data was expected to post 56.9 but a reading of 59.1 not only beat expectations but drove up demand for GBP. The construction reading does not necessarily carry the same sway as manufacturing or services data but is still contributing to GDP growth and any signs of improvements will be beneficial for GBP.
Data from the US was also indicative of an improving economy, the first releases of September again reflecting the gradual improvement of the US economy with the ISM manufacturing figure posting 55.7 versus 54.0 expected. There was also better than expected results in construction spending, faster than expected expansion increases taper expectations but the current tensions surrounding Syria may have implications on the Feds decision.
The possibility of western intervention in Syria is still very real and the US appear to be leading the charge in demands for action. The type of intervention is unknown, but should it be an all-out attack (which we think is unlikely) I would expected taper expectations to be pushed back – it is unlikely the US would look to scale back monetary easing with such uncertainty around.
Geopolitical tensions aside, we have a busy day for fundamental data. The European session will be bringing us Services PMI’s from the Eurozone and the UK, as well as a Eurozone composite PMI figure. Overall markets are expecting no change from July in services PMI’s for France, Germany and the Eurozone as a whole. The Eurozone composite PMI is also expected to remain unchanged.
We are also due for Eurozone GDP releases as well as retail sales for the region. This is the preliminary estimate for GDP but the components that make up the figures have been available for a while and as such we’d expect analysts estimates to be close to the mark, posting .3% growth. Eurozone retail sales are expected to have declined during July by .3%. Overall this looks like a weak calendar for the EUR and may put the single currency under pressure should data from its major counterparts reflect a better economic situation.
The US session brings us trade balance data and the Fed beige book which outlines economic activity. As with most US releases, signs of accelerated growth or out performance will be very supportive of the USD, the major releases this week for the US are Jobs related and with weekly jobless claims and the ADP employment report due tomorrow, ahead of Friday’s Non Farm Payrolls we are sure to see USD volatility over the next three days.
The pound has remained dominant and we have been calling it down from .8650 on the 29th August. We have broken through our major levels of support with the key .8475 area broken yesterday; this leads us to expect a move towards .8400 area where there has been very strong support. Resistance to the topside should come in ahead of .8525.
EURUSD continues its breakdown from recent highs around 1.3400. We have entered a chop zone between 1.300- 1.3250, all year this has been a very direction-less space but with the EUR looking weak against the Pound and the prospect of the taper we favour EURUSD back towards 1.3000. GBPUSD has been trying its best to push higher but strong USD demand from last week’s risk aversion, followed by USD support from stronger US data the pair has struggled to hold above 1.5600, with support lower ahead of 1.5400. We expect to see it rally above 1.5600 sold, so expect this pair to be range bound (1.5415 – 1.5600/5700) until we get further clarity on Fed policy.