Daily Brief

Some alarms and some surprises

GBP/USD slips back

UK data, such as July consumer credit and mortgage lending figures, and the final August manufacturing PMI suggested the UK’s recovery momentum was intact. Yesterday’s data and survey evidence was not a key driver in pushing the pound higher against the US dollar however. That was prompted by the ongoing malaise regarding the US dollar, following the Federal Reserve’s move to a more interpretative policy stance based around inflation averages, rather than inflation limits. The FX markets have been negative on the USD for the past two months despite signs of ongoing improvement in parts of the US economy. This was further evidenced yesterday by the above consensus increase in the headline manufacturing ISM index for August, with the new orders component hitting a 16-year high.

Already this morning, UK Nationwide house price data for August reported prices rising by 2% MoM and up by 3.7% on August 2019. Nationwide indicated that some of the strong gains in house prices were driven by behavioural shifts “as people reassess their housing needs and preferences as a result of life in lockdown.” The housing market has been a critical factor in past recoveries/growth periods, and so such news is likely to be viewed as important for the current recovery effort.

The Bank of England takes the spotlight today. Firstly, there is testimony from Bailey, Ramsden and Vlieghe at the Treasury Select Committee from 2:30pm, whilst Broadbent and Haldane are due to speak and chair a Q&A session at the Central Bank Research Association’s 2020 Annual Meeting. GBP/USD reached a high of $1.3482 during yesterday’s trade session. The comments from BoE officials, perhaps opening the door to additional monetary loosening, could be reason enough to question how much further the pound will rise against the US dollar. That December ’19 high at $1.3514 is a likely critical roadblock to additional headway higher.


EUR/USD high despite inflation slump

Yesterday saw EUR/USD very briefly pop above the $1.20 level during the afternoon of the European trading session. A mixed bag of surveys and data had one big surprise, a slump in provisional August Eurozone consumer price inflation. This took the headline rate back beneath zero for the first time in four years. It last touched -0.2% in April 2016.

The German government’s revision to their 2020 economic forecast, from April’s prediction of -6.3% to yesterday’s -5.8%, indicates that Germany is set to outperform its Eurozone counterparts, across Northern and Southern Europe.

Today sees Eurozone producer prices for July released mid-morning, although this likely to be of little consequence to markets. The Bundesbank President Jens Weidmann is due to speak on “Government in demand” in the early evening, but again this is likely to prove of little significance to the FX markets. EUR/USD was last above $1.20 in May 2018, but then it was on its way lower from multi year highs of $1.2555 in February of that year.


Contraction and recovery

Australian Q2 GDP figures reported a sharper slide in activity than anticipated. Output fell 7% on the quarter, when the consensus had been for a drop of 6%. The AUD had reached fresh two-year highs yesterday, at $0.7414, but has subsequently slipped back on this larger contraction. The Australian services PMI is released overnight, analysts will be looking for growth in August after eight months of contraction. For the AUD, beyond $0.7414 lies key resistance at $0.7516, whilst support can be found at $0.7133, which may seem a long way away, but we traded there as recently as a couple of weeks ago. A general commodity rally, prompted by China’s recovery, may offer the AUD additional support.

The Brazilian Q2 GDP figures were, unsurprisingly, the worst on record when they were released yesterday. Output fell 9.7% in Q2, more than consensus estimates, having dropped 2.5% in Q1, which was larger than previously recorded also. The Brazilian real though enjoyed a healthy bounce, strengthening by almost 2%. That was following a commodity rally, which in turn was led by a jump in China’s Caixin manufacturing PMI, and Brazil’s own Markit manufacturing PMI, which jumped to its highest level since the series began in Sep-17. The Brazilian real has been volatile against the US dollar lately, but crucially looks to have turned the tide that saw USD/BRL reach a 3-month high in late August.  

In Canada, yesterday’s manufacturing PMI release saw activity reach two-year highs, according to the Markit index, as the sector continues to improve following April’s sharp decline. The Canadian dollar missed out on the commodity currency rally however, as the US dollar strengthened a little against CAD. Today’s Q2 labour productivity figures are not a big release for FX markets, especially with Friday’s August employment data looming large on the horizon. A further sizeable improvement in employment of 250k net new jobs is expected, a stronger Canadian dollar recovery against the US dollar.

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