Daily Market Report 16/09/2013

The UK, euro zone and the US all came into focus on Friday with the pound the biggest gainer and the US dollar continuing to weaken further.

The Office of National Statistics revealed that UK construction output grew by 2.2% in July and expanded by 2% on a year on year basis. Adding to the news on Wednesday that UK unemployment fell to 7.7%, the pound continued to go from strength to strength on Friday trading to a new nine month high against the euro and the US dollar.

The euro received some good news as employment change data showed an improvement to -0.1% in the second quarter from a figure of -0.4% in the first quarter.

Data from the US on Friday put pressure on the US dollar as the currency continued to weaken further.  Retail sales grew by 0.2% in August but failed to live up to an expected growth of 0.4%. Consumer sentiment also fell in the month of September to a five month low.  

With all eyes on the Fed’s announcement on Wednesday night, the recent run of disappointing data from the US seems to have sapped out the optimism that investors had two months ago as to how much the Fed were going to taper quantitative easing. Expectations are for the Fed to reduce QE on the lower end of scale by US$10 billion, but given the recent weakness of the US dollar, this reduction looks set to disappoint investors.

The US dollar weakened even further overnight as uncertainty surrounding who will replace Ben Bernanke as the next Fed chairman intensified as news emerged that Larry Summers, who was favourite to replace Bernanke and also in favour of tapering QE, withdrew his name from the seat. Janet Yellen, who is believed to be more in favour of maintaining QE, is now the favourite to take over from Ben Bernanke after the 31st January 2014.

In a speech this morning in Berlin, ECB President Mario Draghi once again reiterated his point from two weeks ago stating that the euro zone economy remains fragile and given the subdued inflation outlook, the headline interest rate will be more likely to remain at 0.5% or may decrease for an extended period of time. Given that the market is already well aware of Draghi’s thoughts, there has been limited impact on the euro following his speech.

The US will come into focus again today with industrial production figures for August and New York Empire State manufacturing index for September – both of which are set to improve from the previous month. Inflation figures are also set for release from the euro zone today with the market expecting a fall to 1.3%.

Key Announcements:

10.00am – EUR – Consumer Price Index (Aug): Expected to fall to 1.3%.

13.30pm – USD – NY Empire State Manufacturing Index (Sept): Expected to improve to 9.20.

14.15pm – USD – Industrial Production (Aug): Expected to improve to 0.4%.