Daily Market Report 03/07/2013

As we approach the half way point of the week, we have seen the US dollar continue its forecasted surge against most of its major counterparts. Tuesday brought with it the quietest day of the week in terms of data showing that UK construction expanded in June for the second consecutive month. However this news did little to bolster the pound’s position as better than expected US factory orders quickly put the dollar on the front foot.

To compound the dollars strong position, New York Fed chief William Dudley stated that he sees growth picking up in the last half of 2013 and as a result, hinted once again at a slowdown of the US quantitative easing program and perhaps an end to the program as a whole by mid 2014.

The euro zone’s problems have hit the headlines once again as Portugal’s finance minister Vitor Gaspar quit. This holds particular significance as his office is broadly responsible for Portugal’s austerity measures. News swiftly followed that the foreign minister, Paulo Portas had also resigned his post. This has now seen the euro fall below 1.30 against the dollar for the first time in a month. Portugal’s Prime Minister has stated that he is trying to hold his coalition government together although this did not stop Portugal’s 10 year bond yields push above 7% (anything above 7% is considered unsustainable).

The rating agency Standard and Poor’s have cut the credit ratings of three major European banks including Barclays from A+ to A with a stable outlook. The reason for this was predominantly due to the large investment arms of these banks having to face continued uncertainty within markets and the exposure to new regulation.

Euro zone retails sales and the precursor to the US nonfarm payrolls – the ADP employment change are also due. The importance of the US nonfarm payrolls figure cannot be over exaggerated as this key indicator will potentially give investors a glimpse as to when the Federal Reserve will start to taper off the QE program. On Wednesday afternoon we are also expecting a positive readout from US non-manufacturing figure (US equivalent of services data). A bullish outlook for the dollar is expected for the rest of the week.

Data released this morning has shown that the service sector in the euro zone has improved from May but has still fallen short of expectations. In the UK, the service sector, which makes up for 75% of total GDP, has expanded even further to 56.9 for June from 54.9 in May. As a result the pound has been boosted this morning, strengthening across the board.

Against the euro we would expect the pound to attempt the topside of its four week range and against the US dollar; the gains should give the pound some short term relief before job data is released this week from the US, which may indeed give impetus for the US dollar to continue its recent strength.

Key Announcements:

10.00am – EUR – Retail Sales (May): Expected to fall further to -2%.

13.15pm – USD – ADP Employment Change (Jun): Expected to show an increase of jobs to 160,000.

13.30pm – USD – Initial Jobless Claims (Jun 29): Expected to fall to 345,000.

13.30pm – USD – Trade Balance (May): The deficit is set to reduce to –US$40.10bn.

15.00pm – USD – ISM Non-Manufacturing PMI (Jun): Expected to improve to 54.