Geo-Political tensions fuel risk aversion

Today's Highlights

• Positive service sector report boosts the Pound

• Improved Us data sees fresh demand for the dollar

• Geo-Political tensions fuel risk aversion

FX Market Overview

Yesterday the Pound surged as it was reported that Service sector activity in the UK expanded at the fastest pace in eight months in July , fuelling optimism over the country's economic outlook. The Purchasing Managers Index rose to 59.1 last month from a reading of 57.7 in June. Analysts had been expecting the index to inch up to 57.9. A level above 50.0 indicates expansion in the industry , below 50 indicates contraction. It would seem that the domestic economy in July has offset the lower growth in the manufacturing sector and this bodes well for output in the second half of the year and calls for an early hike in interest rates will intensify. The Pound found support after the report and is now back in old trading ranges and looking to edge higher.

Over in the states there was some positive news as the Non-Manufacturing Ism came in at its highest level since January 2008 and factory orders rose 1.1% in June. Apart from the blip in the NFP last week the news does seem to be getting better from the US - it now seems justified that the adverse weather in the first quarter was to blame for the poor economic data and that consumers and businesses are back with a vengeance. With QE due to end in October expect more talk of early rate hikes and the dollar to maintain its firmer footing.

Geopolitical tensions between Russia and the Ukraine appear to be ratcheting up as Russian President Vladimir Putin is preparing his government for retaliatory measures against European sanctions and he may have bypassed them anyway by signing a $20bln oil deal with Iran! It would seem that Mr Putin is not buckling under the pressure convinced that Western Governments will blink first. Risk aversion took hold last night as investors retreated to safer havens.

Today we may well tread water as there is very little in the way of market moving data with only industrial and manufacturing output due from the Uk this morning and the US trade balance this afternoon. Investors will probably wait for central bank policy announcements from the BOE and ECB tomorrow before entering new trades. Those of you with an interest in the Australian dollar should be aware that the very important Australian employment rate is released early tomorrow morning. A strong reading is expected and whatever the outcome this is what the market is waiting for to determine near term direction.