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August 2016

Sterling recovers composure as recession risk is downplayed

Published: Wednesday 03 August 2016

  • Sterling recovers composure as recession risk is downplayed
  • Purchasing Managers’ indices abound
  • Aussie service sector improves

Sterling got some of its mojo back in the last 24 hours after The National Institute of Economic and Social Research (NIESR) said the chance of recession in the wake of the Brexit vote has diminished. It is now a 50/50 chance and they see the UK slowing in Q3 but bouncing back a little in Q4. Another doom and gloom prediction we can strike off the list along with emergency budgets and massive tax rises. The Bank of England is highly likely to introduce further stimulus measures tomorrow but the shape and nature of that package is the subject of animated debate. A rate cut is highly likely but it would be a break with tradition for the BOE to act pre-emptively, so don’t be shocked if they sit on their hands for another month. Today’s UK service sector PMI index may well assist in that decision making process.
We heard overnight that New Zealand’s average wages rose by 0.8% in Q2. That is below forecasts but still a healthy pace and puts the kybosh on an early rate cut from the Reserve Bank of New Zealand.
And after the Reserve Bank of Australia cut its base rate on Tuesday, data was published overnight showing the Aussie service sector accelerated in July. The PMI index reading of 53.9 was sharply up from the June reading of 51.3 and adds weight to the RBA’s assertion that there would not be a series of rate cuts in spite of their base rate cut to an all-time low of 1.5%. 
Head of JP Morgan says the Euro could collapse in the next 5 years. His comments follow the EU banks’ stress test results published this week and a sharp fall in EU share prices. The broader picture is one of concern that the UK is pulling out of the EU (not the Euro though) and the continuing disparity between the strength of the German economy and the dire straits in which the Mediterranean countries still find themselves. Today’s diary includes a number of Purchasing Managers Indices from around Europe as well as the retail sales numbers for the Eurozone itself. The forecasts are very mixed so volatility is highly likely.
This afternoon brings the US service sector ISM index. The forecasts are positive and all of these improvements in data tend to suggest the federal reserve will move to raise the base rate at some stage soon but global uncertainty is still at the back of the Open market Committee members’ minds, so that hike may take a little longer to come.
And I love the story of Dang Vuong, a sales manager at a car dealership in Wallsend. An elderly lady had dialled the dealership’s number by accident as she was trying to get hold of her daughter after a fall at home. Dang said to the receptionist that he would go and see if she was alright and, when he arrived, he found the poor woman in shock, with blood all over her face and a bath overflowing. He sorted things out and waited with her until her family and carers arrived before going back to work. Mr Vuong, I salute you.


Ahead of the Presidential elections, the Republican Party decide that they need to know if Donald Trump is psychologically strong enough to run the United States of America. The party’s ruling committee force him to see a Psychiatrist.
So, very reluctantly, Trump goes to the Psychiatrists office in Washington and makes himself comfortable on a buttoned red velvet chaise longue.
“Where do you want to start?” asks Trump.
“Well, why don’t we start at the beginning,” says the shrink.
“Ok, well in the beginning, I created the Heaven and the earth….”

Today's Major Economic Releases 

Market BST Data/Event Previous Expected
GBP 09:30 UK: Services PMI 47.4 47.4
EUR 10:00 EU: Retail sales m/m 0.4% 0.0%
USD 13:15 US: ADP non-farm employment change 172k 171k
USD 14:45 US: Final services PMI 50.9 51.0
USD 15:00 US: ISM non-manufacturing PMI 56.5 56.0

FX Research by David Johnson

Daily Currency Analysis with Michael Condron

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