London Session Forex Recap – August 1, 2016

  • Independence Day holiday in Switzerland today
  • Spanish manufacturing PMI: 51.0 vs. 51.6 expected, 52.2 previous
  • Italian manufacturing PMI: 51.2 vs. 52.5 expected, 53.5 previous
  • French final manufacturing PMI: steady at 48.6 as expected
  • German final manufacturing PMI: revised higher to 53.8 vs. steady at 53.7 expected
  • Euro Zone final manufacturing PMI: revised higher to 52.0 vs. steady at 51.9 expected
  • U.K. final manufacturing PMI: 48.2 vs. steady at 49.1 expected

The pound was kicked lower during the session, thanks to the U.K.’s downgraded manufacturing PMI reading. Meanwhile, risk aversion was the dominant risk sentiment, so the safe-havens were in demand throughout the session, including the U.S. dollar.

Major Events/Reports:

U.K. manufacturing PMI disappoints further – Remember Markit’s special edition PMI reports that sent the pound reeling really hard? Well, we got the final reading for the U.K.’s manufacturing PMI and it was revised lower from a 41-month low of 49.1 to 43-month low of 48.2.

According to commentary from the PMI report, “the decline in production was the steepest since October 2012, with contractions across the consumer, intermediate and investment goods sectors.”

But on a more upbeat note, “The level of incoming new export orders in the UK manufacturing sector rose for the second successive month in July,” thanks to both “the recent depreciation of the sterling exchange rate and efforts by companies to secure new contracts.”

However, “Purchase price inflation surged to a five-year high in July, reflecting a sterling-induced rise in import costs and higher metal and commodity prices,” so the positive benefits to export from the weaker pound may start to fade soon.

Shirai shares her thoughts – Former BOJ Board Member Sayuri Shirai was interviewed earlier today and she said that the BOJ should wait until December before introducing further easing measures, although she also stressed that further easing by September is still possible.

Shirai explained that the BOJ’s announcement of a “comprehensive assessment” will be “another source of volatility“, which would make it harder for the U.S. Fed to justify hiking rates within the year. And should the Fed hike rates, the BOJ would be able to “maximize the impact of any boost to its own monetary policy,” as Bloomberg puts it.

Fed Kaplan speaks – Dallas Fed President Robert Kaplan sounded rather optimistic when he said earlier that “September is very much on the table but I think we’ll have to see how events unfold and so it’s too soon to jump to a conclusion.”

He then added that “We still believe the consumer will be strong in 2016, but it makes us also be very watchful for the next number of data releases to see what trend we’re on.”

Gloomy mood to start the week – Most of the major European equity indices were bleeding out a bit during the morning London session, with the pan-European FTSEurofirst 300 down by 0.45% to 1,341.37, the blue-chip Euro Stoxx 50 down by 0.37% to 2,974.50, the U.K.’s FTSE 100 down by 0.27% to 6,706.50, and the DAX down by 0.08% to 10,329.00.

Market analysts noted that banking stocks were the main losers and were dampening overall risk sentiment, thanks to the poor performance of some banks in the European Banking Authority’s (EBA) EU-wide stress test last week.

Major Currency Movers:

GBP – The pound got whipped when Markit released its special edition PMI report, which showed that the Brexit vote had a negative impact on business sentiment in the U.K. And since the final reading was revised lower to show that things were worse than was initially reported, the pound got kicked lower yet again.

GBP/USD was down by 64 pips (-0.49%) to 1.3184, GBP/JPY was down by 103 pips (-0.76%) to 134.79, GBP/CHF was down by 78 pips (-0.61%) to 1.2773

Safe-havens – The prevalence of risk aversion during the morning London session meant that the safe-havens were in demand, including the U.S. dollar. This was probably because of upbeat rhetoric from Fed Kaplan and from Fed Dudley earlier. Although it’s also possible that forex traders who shorted the Greenback last week were taking some profits off the table.

AUD/USD was down by 22 pips (-0.30%) to 0.7568, NZD/USD was down by 12 pips (-0.16%) to 0.7183, EUR/USD was down by 8 pips (-0.07%) to 1.1156

USD/CHF was down by 12 pips (-0.13%) to 0.9687, AUD/CHF was down by 31 pips (-0.43%) to 0.7330, NZD/CHF was down by 19 pips (-0.27%) to 0.6959

USD/JPY was down by 27 pips (-0.27%) to 102.23, CAD/JPY was down by 31 pips (-0.39%) to 78.21, AUD/JPY was down by 44 pips (-0.58%) to 77.36

Watch Out For:

  • 1:45 pm GMT: Markit’s final U.S. manufacturing PMI (no change from 52.9 expected)
  • 2:00 pm GMT: U.S. construction spending (0.5% expected, -0.8% previous)
  • 2:00 pm GMT: ISM manufacturing PMI (53.0 expected, 53.2 previous)
  • Civic Day holiday for most Canadians today

See also:

Asian Session Forex Recap

Last Week’s Top Movers

Bonnie and Clyde, peanut butter and jelly, Kanye West and Kanye West. Some things just go well together.

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