Pound Finds Support As Manufacturing and Service Sectors Show Improvement

Talking Points
•    Japanese Yen: Remains Choppy On Fluctuating Risk Sentiment
•    Pound: Industrial Production Unexpectedly Improves
•    Euro: EZ Retail Sales Surprisingly Declined
•    US Dollar: ADP, ISM Non-Manufacturing  On Tap

Pound Finds Support As Manufacturing and Service Sectors Show Improvement

The pound jumped 50 pips following fundamental data releases that showed the manufacturing and service sectors in the U.K. stabilizing. The PMI service index rose to 53.2 from 51.6 which was the highest since August 2008 marking the third straight month in expansion territory. U.K. industrial production surpassed estimates of a flat reading for June with a 0.5% improvement which helped erase the -0.7% decline from the month prior. A 0.4% increase in manufacturing led to the broader improvement, which also saw 1.1% increases in mining and oil activity on the back of increasing demand for commodities.

The pound has continued to trade in a tight range following it recent 600 pip rally as risk appetite has started to abate as concerns grow that current valuations may have surpassed future profits. The BoE rate decision looming on Thursday has also limited volatility as the central bank has foreshadowed a decision on its quantitative easing program following the policy meeting. Gilt traders are predicting that the central bank will bring an end to its asset purchase program which could start to provide cable support as we get closer to the MPC meeting. A hawkish central bank and an official end to the additional measures could lead to continued support for the pound. A test of 1.7326-50.0% Fibo of 2.1159-1.3504 still appears likely but a dovish BoE could derail bullish momentum.

The euro has traded in a tight range between 1.4370 and 1.4400 as it continues to take its cue form equity markets which have taken a breather following their recent rally. A drop in Euro-Zone retail sales of 0.2% versus expectations of a 0.3% gain failed to spark any significant reaction. However, the weak demand figures will add to prevailing concerns over whether a global recovery is sustainable without an increase in consumer consumption. The level of unemployment remains high and rising in most developed nations and unless markets see a peak, traders will remain cautious. Therefore, with the single currency’s current correlation to risk sentiment upside potential will be limited without improving employment figures which makes Friday’s U.S. employment report critical for future price direction.

The dollar after firming during Asian hours has started to see its support wane with risk appetite slightly picking up in European markets on improving fundamental data and positive corporate earnings. We could see greenback weakness continue in the US session as the economic docket is filled with releases that are expected to point toward the U.S. economy stabilizing. The ADP private employment report is forecasted to show a job loss of 335K following 473K in June. The report is a leading indicator for Friday’s Non-farm payrolls and typically creates short-term volatility. Additionally, the ISM Non-manufacturing index measures the service sector which accounts for 70% of U.S. GDP and is expected to improve to 48 from 47. However, a print above 50 signaling expansion could reignite equity bulls and sink the dollar.

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To discuss this report contact John Rivera, Currency Analyst: jrivera@fxcm.com