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Sterling stable but it’s all about US rate hikes

Sterling stable but it’s all about US rate hikes

Sterling successfully sidestepped a month-end sell off and it’s consequent attenuation yesterday. The Pound did find resistance just above 1.3150 versus the Dollar and against the Euro support was just below 1.1764. However, a decline in oil prices and weaker equity markets tended to have some negative impact on the UK currency and gilt yields weakened on Wednesday.

Today’s UK PMI manufacturing data will be significant as investors will assume, after last month’s figure showed a 41-month low, that the Bank of England will consider further monetary policy easing. In contrast, a recovery would dampen expectations of further measures and buoy Sterling. The construction and services sector releases on Friday and Monday respectively will also be important for underlying confidence in the Pound.

August’s Eurozone CPI (inflation) data printed weaker than expected; the annual rate held at 0.2% compared with an expected 0.3%. Weak inflation data will cause further concerns within the European Central Bank. It will most likely increase pressure for even more aggressive monetary easing at next week’s policy meeting which will likely undermine the Euro. Also, the Euro unemployment rate stubbornly refused to budge from 10.1%, missing the expected 0.1% drop.

The US rate hike opinion-fest is reaching a crescendo after Janet Yellen’s hawkish comments at Jackson Hole. Boston Fed President Rosengren stated that the Fed was nearing its goals and should consider raising interest rates more quickly over time to help stave-off risks such as rising commercial real estate prices. Chicago Fed President Evans was more dovish with his expectations that interest rates would stay very low.

The August US ADP employment index was slightly stronger than expected, with an increase of 177,000 from the expected 174,000 and there was an upward revision to July’s figure to 194,000 from 179,000. This follows Fed Vice Chair Fischer’s comments that the US was close to full employment. In contrast, the Chicago PMI index was weaker than expected with a decline from 55.8 to 51.5 for August . The stronger than expected increase in pending home sales of 1.3% for July was offset by a downward revision to the June data.

The Dollar lost momentum following the data releases and added to deleterious month-end position adjustments. The Fed’s focus on unemployment will add impetus to the volatility caused by tomorrow’s NonFarm payrolls data.

Data to watch: 9am EUR Eurozone Manufacturing PMI. 9:30am UK Manufacturing PMI. 1:30pm US Unemployment Claims, Revised NonFarm Productivity Q2. 3pm USD ISM Manufacturing PMI, Construction Spending MoM.

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