Market Drivers for November 5, 2013
UK PMI Services at 62.5 well above estimates as cable spikes above 1.6000
Aussie weighed by dovish RBA statement below 9500
Nikkei -0.17% Europe 0.29%
Oil $94/bbl
Gold $1311/oz.

Europe and Asia:
AUD AIG Services 47.9 vs. 47.1
GBP Services PMI 62.5 vs. 60.4

North America:
USD ISM Services 10:00 PM
USD Economic Optimism 10:00 PM

Much better than expected UK PMI Services report propelled pound through the 1.6050 level in morning London dealing as investors became increasingly enthusiastic about the prospects for UK growth into next year.

UK PMI Services printed at 62.5 well above the 59.8 forecast and higher than last month’s reading on 60.3. The underlying data was bullish as well with new business component rising to 63.4 from 60.6 – the highest level since the series began in 1996. The employment index was at the best level in 16 years and output shot to 61.5 versus 60.5 – the strongest showing since 1998.

Overall the composite PMI data suggests that UK economy is growing at a torrid 1.5% q/q pace which translates to an annual rate of 6%. If UK could maintain such momentum it would easily produce the best growth in the G-4 universe and would force the BoE to reconsider its relatively dovish stance. The growth in employment would be particularly important given the BoE policy guidance to become more restrictive once the rate falls below 7%.

Cable climbed all the way to 1.6063 in the aftermath of the news release and was the strongest high beta performer by far in European session rising against the euro and the Aussie. The unit may try to make a run at the 1.6100 level as the day progresses, but for now it has found clear support above 1,6000 and is likely to hold that figure for the time being.

Elsewhere, the Aussie came under some selling pressure in the wake of the RBA statement which was considerably more dovish than the market expected. Despite improvements in consumer demand and housing sector, the RBA noted that below trend growth was likely to persist over the near term and that it was too early to tell if household and business sentiment could keep improving.

Australian monetary officials are clearly frustrated with the high value of the Aussie, noting that it was “uncomfortably high” and tonight’s message may have been simply an attempt to jawbone the currency lower.However, few market participants believe that the RBA will reduce rates further unless economic conditions deteriorate markedly and therefore the Aussie stabilized ahead of the 9450 level and remained relatively steady just below 9500 as traders bet that the Australian economy will continue its steady growth trend.

In North America today the focus turns to the ISM Services report with markets anticipating an essentially unchanged reading of 54.2 from 54.4 the month prior. Special attention will be given to the employment subcomponent which tends to be a very good forecaster of the NFP report due this Friday. If the ISM numbers show little decline the dollar could get a boost, as US economy shows shades of Rocky Balboa it is ability to take a punch and remain standing. If ISM meets or beats expectations, the markets will become increasingly convinced that the taper will come at the start of the year and continue to push EUR/USD lower perhaps testing the 1.3450 support level as the day progresses.

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