Market Drivers August 3, 2016

UK PMI Svc in line cable pops
MOF Watching FX moves carefully
Nikkei -1.88% Dax -0.22%
Oil $39/bbl
Gold $1371/oz.

Europe and Asia:
EUR EZ PMI 53.2 vs. 52.9
GBP UK PMI Services 47.4 vs. 47.4

North America:
USD ADP 08:15
USD ISM Svc. 10:00

It’s been a generally quiet night of dealing in FX tonight with most of the majors contained to narrow ranges in both Asia and early European trade.

Cable continued its short squeezing ways in the wake of the final UK PMI Services print which confirmed the flash reading last week of 47.4. This was the steepest monthly drop on record from June’s 52.3, but market had already absorbed the news last week and viewed today’s data point as relief that conditions have not deteriorated further.

Most of the analysts believe that another few months of sustained reading sub 50 PMIs would push the UK economy into a contraction, but the focus now rests on the BoE meeting tomorrow and the key question for pound traders is whether Mr. Carney and company will cut rates the full 50bp to take rates to zero or a more modest 25bp. If the central bank cuts just 25bp it will be viewed as bullish for sterling and could quickly take the unit towards the key resistance point of 1.3500.

A lot of the deliberation of the MPC will center on gauging the severity of Brexit vote on UK demand. With PM May doing everything in her power to delay the invocation of Article 50 well into the future, some of the market stress has eased from cable as investors as becoming less concerned about an immediate rupture of economic ties. Still, the BoE may want to act preemptively and a 50bp cut would likely send sterling back towards 1.3000 level.

Meanwhile in Asia USD/JPY continues to wallow near the 101.00 level and short of intervention Japanese authorities can only look to US data to help them lift the pair. Today’s ADP and ISM Non-Manufacturing surveys will be key to USD/JPY trade as they will provide an early look at the labor data due Friday. Markets are looking for 170K from ADP and a slightly lower reading of 56.1 from ISM Non Manufacturing.

Any upside surprise could help lift USD/JPY towards 102.00 as several Fed speakers continue to suggest that September will be a live meeting and that a rate hike remains on the table. We doubt this is anything more than just rhetoric, but support from today’s reading could put the bid into the pair for rest of the day. More ominously however, if the ADP and ISM reports miss their mark the downward pressure on USD/JPY will increase and short will try to press the stops at the key 100.00 level as the day proceeds.

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