The sustainability of recent EURUSD and GBPUSD gains was called into question this week, but with key risk factors for both now eliminated, they are the go-to safe harbors amid the ongoing US political standoff.
High-beta currencies remained mildly bid overnight as the impasse in Washington drags on and economic data from across the G10 continues to show improvement, lending some support to the Australian dollar (AUD), British pound (GBP), and euro (EUR).
In Australia, the AIG services index rose sharply to 47.1 from 39.0, its best reading since April. Although the index still remains below the 50 boom/bust line, the strong surge in September suggests that business activity down under may be stabilizing.
AUDUSD rose towards .9400 on the news, and the pair was also boosted by Chinese services PMI data, which printed at 55.4 versus 53.9 the month prior. This was also the best reading since April of this year, showing that the Chinese services sector is starting to expand at a robust pace. Indeed, China raised its GDP estimate to 7.7% from 7.4% initially.
In Europe, the news was positive as well, as Eurozone retail sales increased by 0.7% versus 0.2% forecast. In addition, final Eurozone services PMI printed at 52.2 versus 52.1 projected, which was comfortably above the expansion line. Spain's debt services costs continued to decline as well, as the country auctioned off its ten-year bonds at 4.269% versus 4.503% the period prior.
With Italy having now worked out its political problems, and with the European Central Bank (ECB) seemingly unconcerned about the strength of the EURUSD exchange rate, the pair has now assumed the "safe harbor" status as the political stalemate in the US becomes increasingly rancorous. EURUSD continued to trade above the 1.3600 level and may test 1.3650 as the day unfolds.
UK Data Lends More Support for GBP/USD
In the UK, the PMI services report printed at 60.3 versus 60.0 forecast. This was just a bit below last month's reading of 60.5, but nevertheless, it was the best quarterly PMI result since Q2 of 1997, showing that employment growth continued and some respondents even showed wage increases.
Although aggregate UK PMI data was slightly off last month's highs, it remains well into expansionary territory and suggests that Q3 UK GDP should show significant improvement. That, in turn, should keep the Bank of England (BoE) on the sidelines and continue to provide support for GBPUSD as it hovers near recent highs above 1.6200.
Dollar’s Fate Hangs on ISM Services Data
The rally in high-beta currencies could continue in today’s US session, especially if the markets see no progress on the budget negotiations and US data misses its mark.
With the non-farm payrolls (NFP) report now postponed due to the government shutdown, today’s ISM services report will be the last major economic data point this week. Consensus view is for a slight decrease to 57.2 from 58.6 the month prior. If the data prints in line with those expectations, the impact may be minimal, but if the ISM report prints at 56 or lower, it could quickly send the dollar lower.
In that case, look for GBPUSD to trade above the 1.6250 level and EURUSD to move above 1.3650 as traders, who are already concerned about the ongoing wrangling in Washington, grow more fearful about the strength of the broader US economy.
By Boris Schlossberg of BK Asset Management