ECB policy revision set for today

The pound suffered another difficult day yesterday against the dollar on the back of poor manufacturing purchase manager index (PMI) data, coming in at 51.6 against the forecast of 52.6. This was the lowest reading since April 2013 and coupled with a relatively poor run of data from the UK, is now contributing to the question marks placed over the validity of an interest rate rise.
Growth in new orders in the manufacturing sector dropped to a 19 month low of 50.5, dangerously close the 50 level, signifying the break point between expansion and contraction. The root cause of this has been largely blamed on a, “lethargic Eurozone”, with the surge in UK manufacturing seemingly run its course. Subsequently, the pound lost more ground against the dollar, some 0.3% over the day, hitting the support line published in yesterday’s report at 1.6161 interbank (IB). And this is a trend that many expect to continue, as the feeling is that UK data has topped out and with a stronger tone from the dollar coming into the last quarter, it appears to hold favour with traders and investors alike. However, it’s not all doom and gloom, as sterling was reported in the Bloomberg Correlations-Weighted Indexes (tracking 10 developed-nation countries) to have gained some 1.6% against its nine developed-nation peers – the best performer behind the dollar. And this is certainly reflected in the rates of GBP/EUR, which despite a relatively quiet trading day yesterday, seeing less than 50 ticks of movement, is trading at 2 year highs. This pair has seen continued growth this week, pushing closer to the resistance line published yesterday 1.2880 (IB), failing short by 8 ticks, offering great opportunities for euro buyers. Today’s focus will be the construction PMI data due at 9:30am, forecast at 63.7 against last month’s 64 – further weak data will undoubtedly see further losses against the dollar, so is certainly one to watch.

As with the UK, yesterday saw manufacturing data from Europe, which ticked down slight to 50.3 against the forecast 50.5. Data showed that euro-area factories have been cutting prices in September, contributing to the manufacturing decline and adding to the deflationary problems faced by European central bank (ECB) president, Mario Draghi. All eyes today will be on the ECB press conference at 1:30pm, where the details of the long awaited asset buying program are to be unveiled. It is expected that interest rates will be left on hold, however, it is Draghi’s comments in late September that policy makers, “stand ready to use additional unconventional measures” that hold the most anticipation. The general feeling is that the ECB will start a period of asset buying, more commonly referred to as ‘quantitative easing’ (QE), which will include buying member nations sovereign bonds. This was reflected yesterday in the successful auction of German 10 year bonds, yielding a mere 1%, reflecting the problems of the Eurozone and adding weight to the QE argument. Such measures will almost certainly see the euro depreciate further against the pound and dollar, however, it is felt that Draghi may favour a weaker euro, in order to keep the export market buoyant, as well as increasing consumer pricing on higher import costs. As EUR/USD approaches the best levels for the dollar in almost 2 years, this will certainly be one to watch around lunch time today.

The US also saw their manufacturing data released yesterday, coming in slightly worse than expected at 56.6 against the forecast of 58.6. However this did little to stop the march of the dollar, as we saw another impressive day of trading for the greenback. The dollar continued to push on, almost breaking 4 year highs against major currencies, breaking 110 Yen (IB) for the first time in 6 years and closing in on $1.25 (IB) on EUR/USD. And this trend may well be set to continue, as analysts from major tier 1 banks are speculating that a 5% advance within the next 6 months is highly achievable and quite likely, some even claiming the push could last as long as 2 years!

The key driver to this, is the expectation that interest rates will be raised in the early part of 2015, whilst issues of growth within Europe, China and Japan, may lead to a loosening of monetary policy. Additionally, political uncertainty in the UK caused by the Scottish referendum and the upcoming general election, is causing investors to look to the dollar once again. Unemployment data is due today at 1:30pm forecast at 299k and will be seen as a pre-cursor to the non-farm payrolls due this Friday. Expect another day of volatility, as we see tier 1 data from all three major economies.