Market Drivers for April 3 2014

UK PMI Services misses slightly, Carney suggest rates hiked before election

AU data mixed, Stevens sees early signs of mining handover

Nikkei 0.84% Europe 0.27%

Oil $99/bbl

Gold $1289/oz.

Europe and Asia:

AUD AIG Services 48.9 vs. 55.2

AUD Retail Sales 0.2% vs. 0.4%

AUD Trade Balance 1.20B vs. 0.82B

EUR Final Services PMI 52.2 vs. 52.4

GBP UK PMI Services vs. 57.6 vs. 58.2

EUR Retail Sales xx vs. -0.3%

North America:

EUR Bid Rate 7:45

EUR ECB Presses 8:30

USD Trade Balance 8:30 AM

USD Weekly jobless 8:30 AM

USD ISM Services 10:00 AM

UK PMI data slightly missed its mark pushing cable through the 1.6600 level, but the pair found some support around the figure in morning London trade as markets continued to believe that the BOE remained on track to tighten monetary policy in the near future.

Earlier in the day several BoE governors including Mark Carney stated that a rate hike could happen before the next general election, which is scheduled to take place sometime in May of 2015. Mr. Carney’s comments were published in a local newspaper but were transmitted over Bloomberg during the Asian session causing a 30 point pop in sterling.

Mr. Carney reiterated that the BoE will not be subject to political considerations and will act appropriately on the monetary front as conditions demand. Yet much of the speculation regarding interest rate hikes from the BoE rests on the assumption that UK economy will continue to grow at its current pace.

However, the latest economic data suggest that the economy is slowing albeit only modestly. Still this week we’ve seen 6 months lows in PMI manufacturing and nine months lows in services indicating that the heady pace of expansion at the end of last year is not being sustained. Some of the slowdown may be due to some one off factors as poor weather and flare up of geopolitical tensions all contributed to a chill in economic activity over the past several months. Nevertheless, if the BoE rate hike thesis is to come true, the market will need to see positive rate of change in the monthly PMI indices over the next several months, as the MPC is unlikely to tighten monetary policy until the members are convinced that UK economy has no further slack.

Elsewhere the EUR/USD remained very quiet, trading within a 20 point range for most of the Asian and European sessions as markets awaited the ECB rate decision and press conference. The consensus view is that the ECB will remain stationary but will maintain its dovish rhetoric. Despite further evidence of deflationary pressure, it appears that the majority of policymakers are unwilling to commit to lower or even negative rates just yet.

The final PMI composite reading for March showed that activity slowed slightly to 53.1 but still remains above the 50 boom/bust level providing ECB policymakers with enough evidence to believe that the region can recover organically without further intervention from the monetary authorities.

If Mr. Draghi maintains the status quo then the euro may see a knee jerk bounce higher, but the pair is unlikely to push beyond the 1.3850 level given the disparity of growth between US and the EZ, especially if the ISM services number due at 14:00 GMT meets or beats the market forecast. Traders are looking for a significant jump to 53.5 from 51.6 the month prior as the US economy puts its winter woes behind.

If the ISM prints on target, it will prove supportive not only to the greenback versus the euro, but to USD/JPY as well. The USD/JPY has continued unabated with the pair taking out the 104.00 barrier in Asian session trade today, and if ISM proves positive it may push towards the 104.50 level as the day proceeds.

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