Daily Market Report 04/09/2013

Another strong day for the pound on Tuesday consolidating gains made on the Monday. PMI construction data from the UK once again surprised the market another significant improvement. The level of growth in the construction sector actually highlighted the fastest growth in this sector for 5 years. However this additional good news for the UK economy has caused ripples of unrest within the upper echelons of the banking community. Ex MPC member Andrew Sentence has argued that a rate hike in UK may be on the cards a lot sooner than Mark Carney has envisaged. However this remark was quickly countered by another ex MPC member, Danny Blanchflower, who stated that with one million unemployed at the moment, a rate hike would be no less than ‘totally irresponsible’.

Both have a case and inevitably the debate on interest rates will rage continually never managing to please everyone. However, it does appear to be rather convenient for Mark Carney that the economic growth in the UK has really started to gather momentum as he has begun his tenure. We would be singing a very different tune had the GDP figures come out below expectations in the second quarter. Casting our minds back to the beginning of the year when triple dip recession loomed and it was all too obvious that the UK was struggling to produce any positive data, the recovery in the last six months has been pretty remarkable but more importantly; steady and sustainable (apparently).

The euro weakness this week could potentially be attributed to the German elections later this month. Possible change to the political direction in Europe’s economic power house could lead to the euro wobbling more than expected only a couple of months ago. A four month high between the pound and the euro has allowed the ever patient euro buyers to fill their boots and being within 1 cent of the 6 month highs on this particular currency pair would be difficult to turn down.

Later in the week as the Bank of England and the ECB go head to head in their monthly duel, the impetus is definitely on the side of Carney and his MPC while Draghi, despite seeing some positive news in the euro zone, is still battling with talks of further rate cuts to allow the recovery in the euro zone to spread to Greece, Spain et al where unemployment is still rife.

Overnight the Australian dollar was boosted once again as second quarter GDP grew at a faster pace than many had predicted. The economy grew by 2.6%, surpassing an expected growth of 2.5%. The data adds to yesterdays RBA’s rate statement where they omitted mention of further monetary easing in the way of interest rate cuts and as a result we have seen the Australian dollar gain by 3.5 cents against the pound.

Service sector from the euro zone as a whole disappointed this morning, falling just shy of expectations, causing the euro to weaken early on, but on a bright note services in Germany and Spain did expand.

Services in the UK expanded marginally in August from 60.2 to 60.5. Services in the UK make up 70% of total GDP and the marginal improvement in August explains the limited impact on the pound so far following this better than expected news.

Retail sales and a revision of second quarter GDP figures from the euro zone are due for release this morning; Canada will be in focus with their latest interest rate decision and in the evening the Federal Reserve will release its beige book, providing their latest and forecasts on the US economy.

Key Announcements:

10.00am – EUR – Gross Domestic Product (Q2): Expected to show 0.3% growth.

10.00am – EUR – Retail Sales (Aug): Expected to improve but still show a fall of 0.3%.

12.00pm – USD – MBA Mortgage Applications (Aug): Expected to show a fall of 4.7%.

13.30pm – USD – Trade Balance (Jul): Expected to show a higher deficit at US$38.20bn.

15.00pm – CAD – BoC Interest Rate Decision: Expected to remain at 1%.

19.00pm – USD – Fed’s Beige Book