In Europe Its All Eyes on Jackson Hole

Market Drivers for August 21 2014

EZ PMI show further weakness but Germany holds up
UK Retail Sales decline for 3rd month
Nikkei 0.85% Europe 0.59%
Oil $96/bbl
Gold $1282/oz.

Europe and Asia:

CNY HSBC PMI 50.3 vs. 51.3
EUR EZ PMI Manufacturing 50.8 vs. 51.4
EUR EZ PMI Services 53.5 vs. 53.6
GBP UK Retail Sales 0.1% vs. 0.45

North America:

USD Weekly Jobless 08:30
USD Philly Fed 10:00
USD Existing Homes 10:00

It’s been a lackluster night of trade in the currency market despite several important economic releases as traders appear to be more focused on the upcoming Jackson Hole conference rather than anything on the European calendar.

In the overnight trade the EZ flash PMI readings came in mixed with PMI Manufacturing gauge falling more than expected at 50.8 vs. 51.4 eyed while the services component held steady at 53.5. The weakest reading came from France which saw manufacturing decrease to 46.5 from 47.8 the month prior. Services however held up relatively well with German services reading actually beating the forecast at 56.4 versus 55.5 eyed.

The market steeled itself for a very weak number given all of the geopolitical tensions in the region and the fact that the data was not nearly as bad as feared created a small short covering rally in the EUR/USD with the pair popping to 1.3275 in the aftermath of the release. However, any further rally in the euro is likely to be driven events on the dollar side of the cross as US data comes front and center for the rest of the week.

Elsewhere in UK the Retail Sales number proved to be a disappointment with sales coming in at 0.1% versus 0.4% eyed as the reading missed its estimate for the third month in a row. As several analysts have pointed out with both UK inflation and retail sales both lower than forecast for the past three months, the data makes a mockery of yesterday’s hawkish MPC minutes which saw two members vote for a rate hike. At present neither price pressures nor consumer demand pose any danger to inflation in the UK economy and therefore and monetary tightening would be counter productive.

Cable dipped to 1.6570 on the news but held its ground as the pair now appears to be heavily oversold. Still any further hawkish news from the Fed could quickly drive it below the 1.6500 figure on speculation that the FOMC will beat the MPC to an interest rate hike.
In North America today the market will get a look at jobless claims, Philly Fed and Existing Home Sales all of which could provide further evidence of US economic strength. Any positive surprise could push USD/JPY through the 104.00 mark for the first time in four months as markets gear up for a more hawkish US monetary stance.