Daily Market Report 25/09/2013

The euro weakened against both the pound and the US dollar yesterday following anti-austerity strikes in Greece, ongoing coalition talks in Germany as well as disappointing economic data from Germany.

The day began with investors uncertain as to how long coalition talks with Angela Merkel’s CDU party and the Social Democratic Party could take – some are expecting for the process to roll on for several weeks which could potentially elevate political uncertainty and thus could undermine any strength in the euro.

The German economy then came into focus as the business climate index rose from 107.6 in August to 107.7 in September. However the data was below market expectations and hence the euro dropped following the announcements.

UK mortgage approvals hit the highest levels since December 2009, rising to 38,228 in August; in another sign of revival of Britain’s housing market. However the data did fall short of expectations, potentially signalling that analysts are perhaps a bit too over-enthused about the growth prospects of the economy.

This notion of over-enthusiasm amongst investors and analysts seems to be echoed by members of the Bank of England’s MPC Committee. This week we have had David Miles, Ben Broadbent and Paul Tucker all defending Mark Carney’s Forward Guidance policy citing that keeping interest rates low until the recovery is sustainable would help the upturn in growth. With many in the market believing that interest rates will rise before the three years that the BoE predicted, it would seem that the BoE are quite keen to bring investor’s feet back to the ground.

The US dollar traded in a relatively tight range yesterday following mixed data. The US Housing Price Index rose to 1% in July; however both consumer confidence and the Richmond Fed Manufacturing Index fell from August as well as missing expectations. 

Whilst the continued uncertainty over when the Fed will taper its monetary policy will overhang US dollar movements, the more immediate concern over US budget talks and the debt ceiling and the risk of a congressional standoff has sparked demand for safe haven assets such as the US dollar and the yen. The US dollar has gained two cents against the pound and one cent against the euro since its most recent swing high on the 18th September.
The US dollar could gain further support if economic data due for release today does indeed show that durable goods orders and new home sales increased in August from July.

GfK consumer confidence from Germany this morning came above expectations and as a result the euro erased some of its losses from yesterday.

Key Announcements:

12.00pm – USD – MBA Mortgage Applications (Sep 20): Previously at 11.2%.

13.30pm – USD – Durable Goods Orders (Aug): Set to improve to 0% from -7.3%.

15.00pm – USD – New Home Sales (Aug): Expected to increase to 420,000.