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The Economic Boom Nobody Saw Coming

The Economic Boom Nobody Saw Coming

2013-08-05 13:20:00
Boris Schlossberg, Technical Strategist

Once seemingly mired in recession, the UK economy has been roaring back of late, and today’s standout UK PMI services data has GBPUSD on track to clear major resistance and possibly run to new yearly highs.

Overnight, the UK PMI services report printed at its best level since 2006, lifting GBPUSD through the 1.5350 level in mid-morning London trade. In what is yet another example of a rapidly improving UK economy, the PMI services report rose to 60.2 from 57.4 expected, indicating that Q3 growth should be considerably better than the start of the year.

Not long ago, investors bemoaned the fact that the UK economy was about to sink into a triple-dip recession as GDP was set to contract for the third time since the financial crisis of 2008. However, economic conditions in the UK have improved substantially over the past several months, most recently with the July PMI data beating forecasts in all sectors. Indeed, the combined PMI reading now stands at the highest level since records began in 1998, suggesting that the UK’s economic expansion is gaining momentum.

See also: Key Data That Wasn’t a Flop Like NFPs

The GBPUSD pair rose to clear the 1.5350 level and now stands ready to attack the key 1.5400 figure, which has been a major point of resistance over the past several weeks. Despite robust economic data, sterling has weakened over the past few weeks as investors worried that new Bank of England (BoE) Governor Mark Carney would take monetary policy in a more accommodative direction.

So far, however, Carney has shown little inclination to increase quantitative easing (QE) measures or lower interest rates, and today's very strong PMI results demonstrate unequivocally that the UK economy is effectively rebounding without any additional stimulus.

Therefore, as speculation regarding Carney's dovishness begins to recede, the British pound (GBP) may find renewed strength, and GBPUSD could trade towards the yearly highs of 1.5700 over the next several weeks.

Export Gaffe Drowns NZD/USD

Elsewhere, in Asia today, the New Zealand dollar (NZD) came under heavy selling pressure at the start of this week's trade after Fonterra, the country's milk producer, announced that it may have made several bad batches that were tainted by botulism.

China, Russia, and a slew of Asian countries immediately suspended imports of milk powder until Fonterra could ensure that the production was safe. Milk is one of New Zealand's key exports, and the news crushed NZDUSD, which dropped more than 100 points from its closing price to trade as low as 0.7736 before recovering towards 0.7780 in morning European trade.

Monday’s Key US Economic Data

In North America today, the key economic release will be the ISM services report at 10:00 am ET (14:00 GMT). However, with Friday’s US non-farm payrolls (NFP) report already behind us, much of the excitement surrounding the data is gone.

The markets are looking for ISM services to print at 53.2, which would be a bit better than the 52.2 reading the month prior. If the data does match expectations, it will be a welcome surprise given what has been a decidedly mixed US economic performance over the past month.

If, on the other hand, the ISM data misses its mark, it could push the US dollar (USD) even lower as the day progresses. Under that scenario, we could see USDJPY test 98.00, EURUSD break above 1.3300, and GBPUSD challenge the 1.5400 mark.

By Boris Schlossberg of BK Asset Management

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