Good morning,

USD: Nevada ignored by currency markets

While the world’s attention and concern focused in on Las Vegas following the shootings there, the USD gambolled higher after US factory data released yesterday beat estimates. Yesterday’s manufacturing ISM from the US hit its highest level since May 2004 last month and beat a consensus that was factoring in a sizeable knock to output courtesy of the recent hurricanes. This did not happen and within the report the prices index – a leading indicator of inflation – rose close to record levels.

There is little data to extend the US dollar’s run out today but that does not mean a cessation of USD strength especially given everything that is going on elsewhere in markets although we still have misgivings about how much of the USD move is USD strength and not just weakness elsewhere. Friday’s payrolls data may be able to clear that up for us.

EUR: Political risk continues to depress single currency

Catalan risk is now a very real risk for the euro and EURUSD acted as such yesterday. We are in a bit of a no man’s land legally given the vote over the weekend and what the Catalan parliament now decides to do regarding issues such as tax payments to the central coffers in Madrid and the imposition of Spanish state law.

As we have said before within multiple political events, this will get worse for Spain and the euro before it gets better and although yesterday’s economic data may have shown some strength and resilience investors are seemingly unwilling to add to any euro holdings they may already have.

We expect Prime Minister Rajoy to update us on the situation later in the day.

GBP: PMI slightly weaker but markets take pound lower

Yesterday’s manufacturing reading was by no means the worst that we have seen this year and only slightly below the consensus but was enough to empower investors to sell sterling. As we noted in yesterday’s Weekly Update this week’s run of PMIs may conclude that sentiment in the UK economy is still at good levels but the disconnect between that and reality remains marked and only one can be right. Today’s construction PMI could very easily show a sector in recession but, as is always the case, Wednesday’s services number will dominate.

It is Brexit day at the Conservative party conference in Manchester today. Three of the Brexit Musketeers – Davis, Fox and Johnson – will speak today and therefore we would expect any new hints to come from them although we fear that all will likely be more cheerleaders than thought leaders come the end of the conference session today.

The Day Ahead

The data calendar is a bare cupboard today and politics will fill the void. Events in the US have naturally focused political thoughts on gun control and with a tax plan in the offing some horse trading may be necessary. Similarly we wait on noises from Manchester and Madrid.

Have a great day

Jeremy Cook, Chief Economist