Daily Market Report 05/09/2013

The pound was boosted for a third day in a row as UK services expanded at the fastest rate since 2006. The report by the Chartered Institute of Purchasing and Supply said that new business grew for the eighth successive fuelling expectations that the U.K. recovery is gaining steam.

Revised second quarter GDP estimates for the euro zone confirmed the single bloc grew by 0.3% and thus reconfirmed an exit from recession. Data also showed that growth in the euro zone improve from last year to -0.5% from -1.1% - once again providing evidence of an improvement in the area. Data from the retail sector slightly disappointed, as sales improved in July to 0.1%, marginally missing out on an improvement to 0.4%. Whilst the euro struggled to improve against the pound, the currency did gain against the US dollar.

The US dollar struggled yesterday weakening across the board following data which revealed that China’s service sector expanded in August, increasing risk appetite amongst investors. On the data front the US trade deficit widened more than expected in July to US$39.1bln from US$34.5bln in June. In the evening The US Beige Book revealed that the U.S. economy maintained a “modest to moderate” pace of expansion from early July through late August. The revelation was hardly surprising given that this has been the message from the Fed over recent months.

Separately, the Bank of Canada held its benchmark interest rate at 1% as expected by markets and added that current monetary policy remains appropriate for now and will remain accommodative depending on economic performance.

GBPINR fell by almost 2% overnight after the new central bank governor took steps to boost dollar supply and lawmakers in India moved closer to allowing foreign investment in pension funds.

Looking ahead to today, we have the respective interest rate decisions from the Bank of England and European Central Bank, with both banks expected to keep interest rates at 0.5%. The key event is likely to be the following press conference by Mario Draghi, where although he is expected to be optimistic on the growth outlook for the euro zone, he will attempt to sour investor optimism in order to keep growth sustained.

With the euro zone now out of recession, Draghi will be under pressure to reduce monetary stimulus in the form of increasing interest rates. But with the euro zone only just showing signs of growth, Draghi could well lean towards talking down the optimism in the euro zone and potentially reiterate his stance on maintaining interest rates at 0.5%.

We could well see this same headache fall upon BoE Governor Mark Carney. As we all know, Carney’s forward guidance plan is to keep interest rates at 0.5% until unemployment falls to a threshold of 7%. But with the UK’s recent improved outlook with services, manufacturing and construction all expanding at a fast rate and growth estimates for the UK being revised upwards, Carney himself could be put under the same pressure.

Later in the afternoon, the US will come under focus with the release of service sector and job figures.

Key Announcements:

11.00am – EUR – German Factory Orders (Jul): Expected to fall to 2.7%.

12.00pm – GBP – BoE Interest Rate Decision and Asset Purchase Facility.

12.45pm – EUR – ECB Interest Rate Decision.

13.15pm – USD – ADP Employment Change (Aug): Expected to show an additional 187,000 jobs added.

13.30pm – EUR – ECB Monetary Policy Statement and Press Conference.

13.30pm – USD – Initial Jobless Claim (Aug 30): Expected to show a fall of 1,000.

15.00pm – USD – Factory Orders (Jul): Expected to show a fall in orders of 3.5%.

15.00pm – USD – ISM Non-Manufacturing PMI (Aug): Expected to fall to 55.2