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MARKET REPORT: No signs of weaker Australian economic growth yet

02 September, 2014

By Jameel Ahmad, Chief Market Analyst at FXTM

The Aussie continued to weaken yesterday, after the previous evening’s monetary policy statement from the Reserve Bank of Australia (RBA) expressed that an overvalued currency was hindering Australia’s transition away from mining investment. The AUDUSD concluded trading at 0.9272, the lowest close since 12th August.

Since then, the Aussie has attempted to recover a proportion of these losses following the overnight Australian GDP surpassing expectations. Gross Domestic Product was recorded at an annualised 3.1%, where 3% growth was expected. From a quarterly standpoint, economic growth came in at 0.5%, with most economists forecasting 0.4% growth. While the 0.5% quarterly growth may not have matched the 1.1% growth seen in Q1 and perhaps provides some substance behind the RBA’s previous assertion that Australia was set to enter a period of weaker economic growth, annualised GDP growth at 3% still showcases a strong performance.

The Cable was the other major mover yesterday with the GBPUSD declining by up to 150 pips throughout the day, before concluding trading at 1.6468. This movement occurred despite Tuesday’s UK Construction PMI surpassing all expectations, which was recorded at a seven-month high. It was quickly suspected that the sudden GBPUSD devaluation was linked to the latest YouGov poll showing that the gap between Yes and No for the Scottish referendum had narrowed.

Although I understand that the prospect of an independent Scotland might affect the GBP, I am weary that there could be more than meets the eye in regards to the Cable’s decline. Consistently impressive UK economic performances have been the major contributing factor behind calls for a Bank of England (BoE) rate rise, but Governor Carney squashed expectations of any imminent rate hikes during the latest BoE Inflation Report. The downside movement might actually have been encouraged by an awareness from investors that no matter how strong the UK fundamentals continue to perform, a rate rise remains some distance away.

Today, the latest UK Services PMI are announced which represents a major economic release for the United Kingdom, bearing in mind that not only is the services sector the main UK GDP contributor, but services also employs a reported 80% of the UK labor force. If today’s PMI encourages further devaluation in the GBPUSD, support levels can be found at 1.6445 and 1.6424. On the other hand, if the PMI encourages optimism, resistance is located around 1.6509 and 1.6533.

Moving on to the EURUSD, the pair recorded another yearly low on Tuesday (1.3109) as fears over the geo-political conflict in Eastern Europe alongside a lower than expected EU CPI release on Friday morning continues to weigh on the EURUSD. The pair concluded trading at 1.3131.

Today, a wide variety of EU PMIs, as well as EU Retail Sales are released. Spectators will be cautiously looking at the economic data to gain a better understanding towards whether the European Central Bank (ECB) will need to add further stimulus to the EU economy. If further bearish movement is forthcoming for the EURUSD, a downside break below 1.3104 would signify the lowest EURUSD valuation since 6th September 2013 and perhaps open the doors for further moves to the 1.3092 and 1.3072 support levels.

Finally, the USDJPY continued to reap the rewards of surpassing the psychological 103 resistance level around a fortnight ago. The USDJPY further accelerated after Tuesday’s Manufacturing ISM achieved its strongest performance since March 2011, with the pair trading as high as 105.203 for the first time since January. The pair concluded trading at 105.083.

With the USDJPY advancing by over 200 pips with the past 10 trading days, it would not be unusual for this pair to experience a small pullback before making an attempt to further advance later on.

The chances of a pullback occurring will be enhanced if this evening’s Federal Reserve Beige Book indicates that despite the US economy improving by leaps and bounds recently, the Central Bank will not be hurried into normalizing monetary policy. Potential support levels are located at 104.862 and 104.778.

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