As geopolitical concerns get pushed into the background in the short term, investors were once again able to focus on the more mundane matters of improving economic data yesterday, and by and large appeared to be encouraged by what they saw as Europe’s markets enjoyed a strong start to September, in the absence of US markets for the Labour Day holiday.
Chinese economic data overnight continues to give cause for optimism with the latest services PMI for August slipping back slightly from July’s 54.1 to 53.9 and following on from the 16 month high seen over the weekend in the manufacturing numbers.
While there appears to be the makings of some form of tepid economic recovery in Europe, the UK appears to be leaving Europe in its wake, surging ahead of expectations yesterday seeing a strong manufacturing PMI number for August as business activity touched its highest levels since February 2011 and in the process reinforcing the on-going optimism about the UK recovery in Q3, and a third successive quarter of positive growth.
Even more significant was the fact that output and new orders rose at their fastest rates since 1994, with demand rising from all corners of the globe as well as domestically. Employment was also encouraging, rising for the fourth month in a row. The only concern came from the fact that commodity price inflation on input prices pointed a significant up-tick in inflationary pressure, which doesn’t bode well for a speedy reduction in the inflation numbers later on this year.
If we get a similarly positive number from the August construction PMI numbers today then upward pressure on market interest rates will continue to build and once again test the credibility of the Bank of England’s pledge to hold rates down. Expectations for construction PMI range from between a slight fall from the three year high of 57 seen in July, to 56.9, to an increase to 58, another multi year high.
US markets also return from their long weekend and are likely to be playing catch up after Europe’s gains yesterday. They are also likely to be susceptible to some volatility this week with a host of important data items for markets to mull over this week, culminating with Friday’s non-farm payrolls report.
In the here and now investors will have to content themselves today with the latest PMI and ISM numbers for August. The manufacturing sector has been one of the underperforming parts of the US economy in recent months, but there is some evidence it may be showing some signs of picking up.
The Markit PMI is expected to come in at around the same level as the July number at 54, while the ISM is expected to slip back slightly from the July 55.4 to 54. In any case however good or bad the numbers are we will now inevitably go back to the tedious speculation of the taper on, taper off debate.
EURUSD – the euro continues to come under pressure with the 100 and 200 day MA at 1.3140 the key support areas and the obstacle to a move lower towards the 1.3000 area and the lows this year at 1.2750.
Only a move back above 1.3310 argues for retest back towards the 1.3410 area.
GBPUSD – the pound continues to remain remarkably resilient and while above last weeks low at 1.5440 and trend line support at 1.5470 from the 1.4815 lows, should remain so. We got the move back to 1.5600 yesterday and this remains the barrier to a retest of the highs at 1.5715 last month. Only below the 1.5400 level argues for a sharper move towards 1.5340, and then 1.5260.
EURGBP – last week’s break below trend line support at 0.8517 from the 2012 lows at 0.7705 has seen the euro test the key support area at 0.8470. Not only is this area where the 200 day and 200 week MA currently sits but it is also the May and June lows as well. A move below here could well open the trapdoor for further declines towards the 0.8395 April lows.
USDJPY – yesterday’s break above the cloud resistance at the 98.80 level and the 98.90 trend line resistance from the May highs at 103.75 opens up the possibility of a test back towards the 100.30 area initially, and then a retest of the highs this year. Only a move back below 98.80 undermines this scenario and argues for a test back towards the 97.00 level.
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