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Draghi distracts as markets brace for change

Draghi distracts as markets brace for change

GBP
The UK PMI services-sector index declined to 53.2 for August from 53.8 previously. This was below consensus forecasts of 53.5 and the lowest reading for 11 months. There was, however, evidence of increased capacity constraints as order backlogs increased with a stronger rise in employment and higher prices.

The Pound moved above 1.3000 against the Dollar as GBPEUR was trading at levels of 1.0928 on Wednesday.

USD

The US Dollar fell 0.4% on the day yesterday over concerns about North Korea’s missile tests came to the fore, but most of the decline appeared after the disappointing durable goods orders data. Also contributing were dovish Fedspeak and the potentially huge impact that Hurricane Irma could have this weekend.

Robert Kaplan, president of the Federal Reserve Bank of Dallas, was speaking and he still looks for 2.25% economic growth in 2017 for the US and for the unemployment rate to decrease. Brainard remained concerned about recent low inflation and felt increasing rates more gradually than the median forecast was prudent, but was ready to start shrinking the balance sheet. Kashkari, on the other hand, said rate hikes may be doing real harm to the economy.

In the US, the ISM non-manufacturing index in August is due out today and will be a key economic release followed by the Fed’s Beige Book and the API’s report on US crude oil supplies.

EUR

Eurozone PMI services-sector release was corrected lower to 54.7 yesterday for August from the flash reading of 54.9, with latest retail sales data fractionally weaker than expected. The overall impact was limited with attention from a Euro perspective focused on Thursday’s European Central Bank (ECB) policy meeting, although the Euro under-performed slightly.

On a quiet day for the Eurozone eco data, investors will have half an eye on the ECB policy meeting tomorrow. The ECB is perceived to be on the cusp of announcing the winding down of its quantitative easing (QE) programme, currently worth €60 billion a month as the Eurozone economy continues to show a robust recovery. However, the strength of the Euro could delay the central bank’s plan as it will undermine inflation in the long term.

How the Euro will react to Thursday’s meeting will depend very much on the direction Draghi will choose. The most bullish outcome for the Euro would be if Draghi & Co. were to surprise the market with an announcement regarding QE tapering in conjunction with downplaying concerns over Euro strength.

On the flip side, the most bearish scenario for Thursday would be if Draghi were to talk down any tapering and spend a large portion of his speech discussing the risk sentiment behind the overpriced Euro and the effect this may have ECB policy goals being reached.

Data To Watch:
12:30pm USD Trade Balance (Jul)
13:45pm USD Markit Services PMI (Aug)
13:45pm Markit PMI Composite (Aug)
14:00pm USD ISM Non-Manufacturing PMI (Aug)
18:00pm USD Fed’s Beige Book

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