Sterling rallies off better than expected UK data...
Week Commencing Monday 5th September 2016
UK: Brexit not such a headache after all!
UK Services rebounded and returned to growth in August, just a month after the decision to leave the EU triggered a contraction in activity and spurred the Bank of England to loosen monetary policy.
The Markit/CIPS UK service purchasing managers' index rose to 52.9 in August, from 47.4 in July. This represents the biggest month-on-month rise on record and more than reverses the record drop of 4.9 points in July. This comes as both manufacturing and construction posted similar upside figures, with the Markit/CIPS manufacturing purchasing managers' index rising to 53.3 in August from July's figure of 48.3. A figure above 50 indicates expansion.
The construction PMI figures also jumped to 49.2 in August from 45.9 in July. All this seems to be flying in the face of downbeat remainers, who predicted severe downside shocks to the UK economy in the event of a Brexit. Maybe, these fears were unfounded, however there are plenty of “Brexit” inspired hurdles to cross in the months ahead. Watch this space!
US: Job growth continuing but not as fast as hoped...
US job growth remained steady in August, although employers pulled back slightly on hiring.
The US economy added 151,000 jobs last month, according to a Labor Department report on Friday. The unemployment rate remained unchanged at 4.9 percent. The jobs report is especially crucial as economists and investors are using it to predict when the Federal Reserve will once again hike interest rates.
Most analysts have now pulled back their predictions of a rate hike this month, with expectations now set for December. That would be a full year after the Fed first raised the short-term rate it controls after leaving it pegged at nearly zero for seven years.
INDIA: Growth slows, but still the envy of the world!
India's economy grew at its slowest pace for two years in the April to June quarter, according to official government figures.
The economy grew at 7.1 percent in the second quarter, versus 7.9 percent in the previous quarter. The economic activities which registered growth of over 7 percent in the April-June period include the manufacturing, utilities, services (both financial and leisure) defence and others.
Growth in agriculture; forestry and fishing; mining & quarrying and construction is estimated to be 1.8 per cent, 0.4 per cent, and 1.5 per cent respectively. Despite India's breakneck growth rate slowing, it is not enough to cost it the title of world's fastest growing big economy.
EUR/USD dipped to 1.1122 last week but recovered since then. Should there be no nasty surprises in either Draghi on Thursday and ISM on Tuesday, we should see the pair trade within its range for the week. Below 1.1122 will turn bias to the downside for 1.1042 support. Break will target a test on 1.0911 support. In case that rebound from 1.0911 extends, we expect strong resistance from 1.1426 to limit upside.
GBP/USD's rise from 1.2865 continued last week and outlook is unchanged, especially in conjunction with the bullish PMI prints from the UK last week. Initial bias stay on the upside, with the 1.3480 level of resistance the first likely barrier. Should we see some adverse geo-political developments surrounding Brexit, we expect 1.3050 to act as the first level of Sterling resistance, so expect a week in the 30’s moving forward.
Again, much like GBP/USD, GBP/EUR should trade within its current range with a bias to the upside. The 1.20 pivot is important and will take some pressure to break, however a decent Manufacturing Production or bullish Carney could just do it. Should we see any downside, we expect Sterling to hold its own at the 1.1675 level of resistance, with any break pushing Sterling lower.
Economic Calander for the Week
This week for the UK we look forward to Services PMI, already released much better than expected at 52.9 versus an expected print of 50.0. After which we turn our attention to Manufacturing Production, which seems set to buck the current trend and post a further decline by -0.4 percent versus last months -0.3 percent print.
Also on Wednesday we look forward to the Bank of England’s monthly inflation report and Mark Carney’s speech. Markets will watch for further post-Brexit analysis from Mark Carney and any hints on potential additional monetary action from the Bank.
In the US we have a bank holiday on Monday, so expect trading volumes to be lower during the trading day. Tuesday sees ISM Non-Manufacturing PMI released with a small downside revision expected to 55.0 from last month’s 55.5. Finally, we await Crude Oil Inventories on Thursday, with little expectation of any discernible change however this is unlikely to push markets either way.
We have a busy week ahead for Europe, with all eyes on Thursdays ECB meeting. We expect no shift in policy action from Mario Draghi, however his assessment of the post “Brexit” European economy should be interesting. Italy and others remain vulnerable to shock events, and Draghi could do well to calm markets with a “all that it takes” approach once again.