GBP/EUR 1.2082 (0.8275)
Global manufacturing saw further signs of improvements yesterday and despite a slight pick up in the Eurozone, the pace of manufacturing growth in the UK and the US is clearly outpacing the struggling single currency region. The USD and GBP were some of the stronger performers on the day yesterday and overnight AUD has faced selling pressures, despite the RBA keeping interest rates at 2.5%. Asian equity markets followed the US session lower and strong manufacturing data once again saw speculation increasing for a December taper.
In our view a December taper is unlikely but markets appear to be willing to price in some probability the Fed will take actions before the year end. The sell off in US equities and a USD rally on the back of stronger data certainly suggests this and was also supported by a rise in ten year US treasury yields, moving back to 2.8%. The big event of the week on this front will be Friday’s Non-Farm Payrolls, any release deemed as positive will likely see this speculation increase and be supportive of the USD.
The Euro struggled yesterday despite seeing some signs of improvement in manufacturing. Italian, German and French figures were all better than expected, it is worth noting that the French reading was still pointing towards contraction in the industry. The Eurozone figure came in at 51.6 vs 51.5 expected, but the single currency still struggled to find buyers ahead of this week’s ECB meeting. Looking at comments from Mario Draghi we think it is unlikely we are to see any changes from this week’s meeting, with rates held at .25%. The press conference and statement will be key, especially if there is any further indication of negative deposit interest rates for the region.
UK data continues to exceed all expectations and manufacturing data released yesterday was no different, posting 58.4 vs 56.1 expected, its highest level since February 2011. The pound remained firm but advanced little against USD which is an indication we may be reaching exhaustion on the move from 1.4800 in July. EURGBP held below key support turned resistance at .8300 and 10 year UK gilts reached a two month high. Improvements in the UK economy have been consistent and inflation concerns may well be addressed in the Autumn Statement but that does not mean we will see rates rise any time soon.
Today’s calendar is very light on major releases and the only data of interest in the morning session comes from the UK in the form of construction PMI’s due out at 9.30am. The pace of construction growth is expected to have slowed from October, albeit only marginally. Eurozone producer prices are due and should they be weaker than expected the single currency may well face selling pressure on disinflationary concerns.