2nd September 2010

Daily outlook

Sentiment continues to flip between risk appetite and risk aversion on a daily basis. Yesterday’s session saw investors tempted back into riskier currencies largely driven by encouraging data from the US.

Sterling failed to take advantage of the positive shift in sentiment after disappointing manufacturing and house price data which weighed on the currency, sending it close to 1-month lows against the euro and lower against a number of other currencies.

US data continues to be the main driver of sentiment and yesterday’s robust US ISM manufacturing data helped lure investors back into riskier assets. The data offset another weak US ADP employment report and was enough to send equity markets higher.

As a result, safe haven currencies suffered with the US dollar finding support against the Japanese yen, moving away from recent well publicised 15-year lows. The Swiss franc fell away from lifetime highs against the euro.

The sustainability of yesterday’s pick up in risk appetite will be tested today with a huge line up event risk from the Euro Zone, and the US. Key events in Europe today will be the ECB’s interest rate decision alongside revised Q2 GDP and producer prices. Across the pond, the US sees a plethora of releases including pending home sales, durable goods and weekly jobless claims.

  • United Kingdom
    Nationwide House Prices (Aug)
    CIPS/ Market Construction PMI (Aug)
  • United States
    Weekly Jobless Claims
    Labour Costs (Q2)
    Productivity (Q2)
    Durable Goods (Jul)
    Factory Orders (Jul)
    Pending Homes Index (Jul)
  • Euro Zone
    ECB Interest Rate Decision
    Revised GDP (Q2)
    Producer Prices (Jul)
    France – ILO Unemployment (Q2)
    Italy- non-EU Trade Balance (Jul)

Currencies outlook

Sterling

Sterling failed to take full advantage of yesterday’s risk-favouring environment. Weak UK data raised further doubts over the sustainability of the UK economic recovery. As a result sterling fell to just off one month lows against the euro on Wednesday. CIPS manufacturing PMI fell to 54.3, well below the expected 57 level. Although the sector remains in expansion territory, the survey showed activity slowing. The report also suggested a further slowdown with looming public spending cuts keeping UK manufacturers on edge. House prices were also seen falling according to Halifax, with its report for August showing prices fell by 0.3%. Today’s Nationwide House Price survey will give markets further clues on the health of the UK housing market and another downside surprise may put further pressure on sterling.

US Dollar

Encouraging data saw the US dollar firm against safe haven rivals Swiss franc and Japanese yen on Wednesday. The US ADP employment report showed jobs falling by 10k, firmly in negative territory, and below the forecasted rise of 19k. However some analysts took positives from the news as although employment is falling, it looks to be falling at a slower pace. On a much more upbeat note, US ISM manufacturing PMI rose to levels of 56.3, above the forecasted 53. This marked the 13th straight month of expansion in the manufacturing sector. Interestingly the report also showed employment conditions improving. Today’s highlights will be pending home sales and weekly jobless claims. Jobless claims will give markets further insight into the health of the US jobs market as investors and traders shift their focus to tomorrow’s Non-Farm Payrolls release.

Euro

The euro moved higher against sterling, found support against the US dollar and pulled away from record lows against the Swiss franc yesterday despite mixed data. Euro Zone manufacturing PMI rose slightly above expectations. However it is another piece of evidence showing the continued divide between Euro Zone economies. Manufacturing sectors in Spain and Italy were seen as contracting while Germany and France continued to grow. There was a surprise as German retail sales fell below expectations for the month of July. The fall to -0.3% shows signs of a cautious German consumer amid the gloomy global outlook. Focus today will be on the ECB’s interest decision and more importantly the central bank’s accompanying statement for clues on future policy moves. Revised Euro Zone GDP figures for quarter 2 are also due for release along side producer prices for the 16 member bloc.

Japanese Yen

Despite yesterday’s pick up in risk appetite which saw the safe haven yen suffer against riskier rivals, the Japanese currency found some support overnight. Weak export data from Australia coupled with expectations of another bad jobs figure from the US tomorrow is keeping the sustainability of riskier moves hard to come by. With such a heavy line up of event risk from across Europe today and the US this evening, the yen could find more support if investor sentiment sours going into Friday.