Friday AM - GBP: Services PMI | USD: Employment Data | AUD: Retail Sales Beat | EUR: PMIs

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GBP

Sterling trades more or less where it settled following the exciting bout of volatility injected by the Bank of England's 25bps interest rate rise.

That the Pound settled there is instructive - it is not interested in interest rate rises as would have traditionally been the case.

Instead, political risks ensure it embodies a premium that makes it heavily undervalued when compared to fundamentals.

When Brexit risks fade, we would expect this currency to pop and therefore the October EU Summit remains the biggest date in Sterling's calendar.

Ahead today there is some important data in the form of the services sector PMI.

Yesterday we saw the construction sector PMI easily beat expectations, suggesting the economy is recovering a decent head of steam as it works into the second-half of the year.

The PMI number is out at 09:30 B.S.T. and markets are eyeing a read of 54.7, down from the previous month's 55.1.

Typically a deviation around the number would prompt an FX response, but with the August interest rate rise out of the way we expect markets will be a little less interested in economic data than they have been for much of the summer.

Indeed, for Sterling all roads lead to Brexit.

USD

For the Dollar, US employment data is on tap at 13:30 B.S.T.

Markets will be looking for the headline non-farm payroll figure to read at 193K with the unemployment rate shifting down to 3.9% from 4.0%.

However, it could well be that average weekly earnings steel the show as this has a more direct route to US inflation expectations, and by extension US Federal Reserve interest rate expectations.  

Average hourly earnings are forecast to have grown 0.3% month-on-month taking the annualised read to 2.7%.

Disappointment here could weigh on the US Dollar which has certainly become accustomed to bumper economic data releases.

"Economists are looking for a slight slowdown in job growth but any decline will be easily offset by higher wage growth and a lower unemployment rate," says Kath Lien at BK Asset Management. "As long as both of these predictions are met, the Dollar will rise. Its gains should be the most pronounced against the commodity currencies and Sterling."

Lien lists the following arguments for and against a strong payroll reading:

Arguments in Favour of Strong Payrolls

1. ADP Rises from 181K to 219K
2. Consumer Confidence Index Rises Slightly to 127.4 from 127.1
3. Challenger Reports 4% Drop in Layoffs
4. 4 Week Average Jobless Claims Falls to 214.5K from 224.7K
5. Continuing Claims Drops to 1.72M from 1.74M
 
Arguments in Favour of Weak Payrolls

1. University of Michigan Consumer Sentiment Index Declines Slightly

AUD

The Australian Dollar was an outperformed thanks to some consensus-beating retail numbers released this morning.

Retail sales for June grew 0.4% month-on-month while the quarterly rate grew 1.2% in the second quarter.

The rise in retail sales volumes come despite falling house prices and high petrol prices, both of which would be expected to negatively impact consumer sentiment.

And, retail prices remain under pressure, falling in all categories except cafes, restaurants and take away in Q2.

There is thus no corresponding inflationary pressure contained in the report, and for the Reserve Bank of Australia it is inflation that would prompt the interest rate rise the Australian Dollar really needs if it is to get a lift.

Therefore, the benefits of the retail sales numbers might prove to be fleeting for the currency.

"Households appear to be responding to lower prices," says Jo Masters with ANZ. "From a policy perspective, the RBA will take some comfort that falling house prices do not seem to be impacting household spending – at least at this point."

EUR

We have a slew of PMI data out of the Eurozone today - this data is considered second-tier in nature when it comes to the Euro, so any sizeable impact on the value of the currency is unlikely.

The services PMI is released at 09:00 B.S.T. and is forecast to read at 54.4, the composite PMI is forecast to read at 54.3. Any deviation from expectation could trigger short-term moves in the Euro.

Keep an eye out for Eurozone retail sales data, due out at 10:00 B.S.T., markets will be looking for an annualised reading of 1.4% and a monthly reading of 0.4%.

CAD

Trade data are due in Canada at 13:30 B.S.T. with markets looking for the trade balance to read at -2.3BN.

With so much focus being placed on the NAFTA negotiations it is clear that trade matters for Canada and the value of its currency.

Typically we would expect a positive currency response if the deficit comes in smaller than forecast by the markets.

Analysis from RBC Capital Markets shows a 0.7% drop in imports should unwind part of the sizeable 1.7% surge recorded in May thanks to a weakening in oil prices which should weigh on the energy import component.

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