Divergent economic data from the UK and Australia has those nations’ currencies headed in opposite directions ahead of today’s much-anticipated US jobs and ISM services reports.
It has been a night of divergent price action in high-beta FX with the Australian dollar (AUD) sinking to fresh weekly lows while GBPUSD rose to new highs as data down under disappointed and UK news delighted investors.
In Australia, both the PMI Services report and GDP data missed the mark. AIG Services PMI came in at 40.6 versus 44.1 expected. That reading is deep in contraction territory and is the worst reading in more than a year.
Furthermore, Australian GDP data printed at 0.6% versus 0.8% expected as capital investment waned. Indeed, without the 1.0% contribution from export growth, Australian GDP would have actually been negative in the first quarter.
The news only exacerbated market concerns that the Reserve Bank of Australia (RBA) may lower rates once again in order to prop up the softening Australian economy. The AUDUSD tumbled through the .9600 barrier and remained weak throughout Asian and early-European dealing, nearing the .9550 mark in the process.
So far, the pair has been able to hold above the key .9500 level, but if it sees further selling in today’s North American trade, the Aussie could test that key support as the day progresses.
More Upside Surprises in UK Data
The news was diametrically opposite in the UK, where the PMI services report completed a trifecta of upward surprises this week. UK PMI services rose to 54.9 versus 53.0 expected, representing the strongest showing in more than a year. The figure was helped by better weather and was boosted by a rise in new orders, which reached the highest level since February 2010.
This was the third positive report out of the UK economy this week, providing a lift to GBPUSD longs as fears of additional quantitative easing (QE) measures by the Bank of England (BoE) have been allayed for the time being. GBPUSD rose to a high of 1.5375 before settling down a bit, but the pair remains well bid and could make a run for the 1.5400 level later in the day.
US Jobs Data Takes Center Stage
In North America today, all eyes will be on the ADP report and the ISM services data. The dollar has been trading on the back of US fundamental news rather than risk flows for the past several months, so today's releases are likely critical. The market anticipates a reading of 165k for ADP and 53.5 for ISM services, but given the upwards creep in weekly jobless claims, the prospect of a downside miss is quite real.
See also: The Job Report to Watch on Wednesday
If the data does disappoint, EURUSD is likely to test resistance at the 1.3100 level once again. The pair has failed at that figure several times this week, but any downbeat US data could finally push it through that key resistance level as traders sell the greenback on diminished hopes of any near-term Fed tapering.
By Boris Schlossberg of BK Asset Management