Economic data this morning are adding legs to the perception that the worst of the global downturn is over. The release of Chinese July Manufacturing PMI reached a 12 mth high showing expansion for a fifth consecutive month, India's PMI registered its fourth consecutive expansion, UK manufacturing PMI this morning registered expansion for the first time in over a year while improvements were also reported from the Eurozone, Denmark, Australia, Hungary and Poland. Poland also benefitted from an assurance from the IMF that it may upgrade its 2009 and 2010 economic growth forecasts in the autumn. Coincident with this economic data is good news from the banking sector which underpinned stock markets in the European session and gave the risk trade more traction. Commodity prices have also rallied of the back of the boost in optimism. As a consequence of improved risk appetite, several currencies pairs including cable, AUD/USD, USD/CAD, NZD/USD, EUR/GBP and AUD/USD have been breaking out of recent trading ranges.
Noticeable for its absence in the currency pairs listed above is the EUR. EUR/USD has yet to hold above the 1.4300 level and EUR/JPY is failing to fully reflect the increase in risk appetite by remaining below its recent high just above 136.00. The better than expected Eurozone July manufacturing PMI number at 46.3 is reassuring for the economic outlook in the region.
owever, the much greater than expected -1.8% m/m fall in German June retail sales was a depressing reminder of ongoing recessionary conditions. Also containing the EUR is Thursday's upcoming ECB meeting and calls from the IMF last week that the ECB should take further action on policy.
The BoE's MPC is also due to meeting on Thursday . Surveys are suggesting that the market is split on whether the BoE will extend its present QE plan. More QE will weigh on the pound. However, today's PMI number along with last week's hints that the UK housing market is stabilising put the suggestion that the UK economy will return to growth by year-end back in focus. As a consequence, an expansion of QE may be less likely. Having been squeezed higher, cable has retreated off its highs by 1.6878 this morning. Sterling has also retreated from its strongest levels vs the EUR and the JPY suggesting that a short-term cap may be forming.
This afternoon the release of the US manufacturing PMI data for July will be the key focus. The market is expecting the data to show the pace of contraction continues to moderate. US July vehicle sales will also be watched as an indication of the health of the consumer sector.
