Market News & Insights
2 September 2014

Manufacturing Slumps in Europe’s Core

EUR/USD 1.3132
GBP/USD 1.6570
GBP/EUR 1.2618 (0.7925)
EUR/CHF 1.2077
GBP/CHF 1.5239
GBP/AUD 1.7813

The first trading day of September offered very little in terms of major data or new trends. Equities in Europe closed marginally higher after a lacklustre day ended in a late rally. US markets were closed for labour day so much of the focus was on the Eurozone and the single currency continued to feel selling pressure as EURUSD fell close to annual lows, with 1.3104 the next level of support representing last September’s lows. In overnight trading the RBA opted to keep rates unchanged and removed their complaint about the Aussie being too strong, they echoed their sentiment on maintaining current rates which has seen AUD trade lower.

In Europe the single currency was under pressure following the release of manufacturing PMI’s for the region. The Eurozone figure was lower than expected dropping to 50.7 from 50.8. The slowdown in growth was led by declines in Italian and German readings, French data was stronger than expected but still indicative of an industry in decline. European data continues to put pressure on the ECB and with that expectations for further easing keeps pushing the EUR lower, should the ECB fail to act in this month’s meeting (we do not expect any changes to policy at this stage) the single currency may well have room to run higher in the short term.

Today’s calendar in Europe remains relatively light with only producer price data due, these are expected to have dropped .1% through July, with the year on year figure falling 1.1%. This is once again indicative of declining prices across the region with producers often passing on costs to the consumer. Tomorrow services PMI data and Retail sales will shape the final picture before the ECB meet on Thursday and without supportive data longer term pressure on the EUR is to remain to the downside.

There is plenty of data from the UK this week and despite a weaker than expected manufacturing PMI print yesterday, the pound held some of its gains before once again reversing lower later in the session. A bigger than expected drop in manufacturing PMI data put a stop to the pounds rally yesterday as manufacturing fell to 52.5 vs 55.1 expected, a big drop and a return to mid 2013 levels. Construction PMI data is due for release today as well and with a close correlation between manufacturing and construction we are siding towards a downside miss on this print which may well put some further downside on GBP. EURGBP made another attempt lower to break .7900 briefly while GBPUSD failed to hold above 1.6600. GBP has been under further selling pressures this morning ahead of the construction print, is the market already pricing in a bad figure?

The light data calendar in the European session will put focus on the return of US markets and most notably the ISM manufacturing print. The index is expected to drop from 57.1 to 57.0, implying the pace of factory sector growth has marginally slowed from three year highs. US data has tended to be to the upside lately, with analysts apparently underestimating the pace of US recovery the door is open to an upside surprise on this print. Anything better than expected will once again be USD supportive as calls for timing on rate increases see attention turn towards the Fed.