Daily Financial Market Outlook

Daily Forex Fundamentals | Written by Lloyds TSB | Sep 02 08 07:06 GMT |

Overview & economic commentary

A flurry of data releases and government comments triggered a sharp sterling sell-off yesterday. Selling carried on overnight, especially against the dollar (£/$ below 1.79), thanks to a 7% drop in oil prices. There are no UK data releases today to inform further on the debate about economic growth and inflation. Elsewhere, the US ISM manufacturing index may strengthen to 51.0 in August from 50.0 in July, a weak number based on historic trends, but still indicating expansion, see chart a. Other components of the confidence index, including employment and prices will give further clues to inflation and labour market outcomes. Also from the US, construction spending is likely to have contracted a further 0.3% in July, leaving spending growth well below the peak in January 2006, see chart b. Other data today include EU-15 producer prices for July, which are forecast to rise by 1% on a monthly basis and by 9.8% on an annual basis, compared with 0.9% and 8% respectively in June. Speakers today include Swiss National Bank member Jordan (15:30) and ECB member Tumpel Gugerell (22:00). The UK DMO auctions £2.25bn of 2049 conventional bonds and this could be a good test of overseas interest for sterling fixed income assets. Earlier this morning the Reserve Bank of Australia cut interest rates from 7.25% to 7%, the first cut since 2001, as widely expected on weaker credit expansion and signs of slower GDP growth. The Bank was very vague on future rate movements but in our view is likely to lower rates once more this year if incoming data show a weakening of inflation pressures.
Currency commentary

The meltdown in sterling and spike in volatility carried on overnight, with £/$ sliding below 1.79 and €/£ rallying above 0.8150. The yen and the dollar have been the biggest gainers vs sterling since August, racking up a rise of more than 10%. With political pressure adding a completely different angle for overseas investors, the DMO could struggle to attract demand for its 2049 conventional gilt auction. Support level for £/$ runs along 1.7800. One-month £/$ vol spiked above 11.5 o/n, the highest since March. Selling in €/$ has been more limited but we could see further downside unfold as oil prices slide below $110 support. The RBA delivered its first cut in interest rates overnight, trimming the cash rate by 25bps to 7.0%. The A$ is offered this morning on speculation that monetary easing could be in the offing later this year. The US manufacturing ISM is the only noteworthy data release that could move the fx market today. Oil prices and stocks should provide most of the volatility.
Major data and events today

* US ISM manufacturing index (15:00)
Jul 50.0
Aug (f'cast) 51.0
Median 49.6 Range 48.5:52.0
* US Construction spending (sa) (15:00)
Jun -0.4%
Jul (f'cast) -0.3%
Median -0.5% Range -0.9%:+0.2%
* EU-15 producer prices (10:00)
Jun +0.9% Y-O-Y +8.0%
Jul (f'cast) +1.0% Y-O-Y +9.8%
Median +1.2% Range +0.3%:+1.9%
* Japan Monetary base (00:50)
Jun Y-O-Y -0.7%
Jul (f'cast) Y-O-Y -1.0%
* Australia interest rate decision (05:30)
Current: 7.25%
Actual: 7.00%
* Bank of Japan member Shirakawa speaks (02:00)
* Swiss National Bank member Jordan speaks (15:30)
* ECB member Tumpel-Gugerell speaks (22:00)
* UK DMO auction of £2.25bn, 2049 conventional bond


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