European markets are poised for another higher open on Tuesday, taking the lead from the more bullish sentiment that drove US indices to some decent gains at the start of the week and much of Asia higher overnight. Monday’s economic releases were broadly quite encouraging albeit with the odd bit of concerning data hidden within them, for example the employment component of the ISM manufacturing number.
U.K. Construction Expected to Continue Recovery in Q4
Today is one of the quieter days for economic data in what is a very busy week, although there are still a couple of noteworthy releases. The U.K. construction PMI will be of interest this morning given that the sector was a drag on output in the third quarter. The PMI has been gradually improving in recent months and hit 59.9 in September, with new projects increasing the need for more employment. The biggest issue facing the industry now appears to be a skills shortage which could affect productivity following such a prolonged slowdown during the financial crisis but overall conditions are improving. If that can continue in the coming months, as it is expected to in October, construction may contribute to GDP in the final quarter rather subtract from it again.
GBPUSD Facing Big Challenge to Break Above 1.55
The pound is looking pretty steady against the US dollar ahead of the release. We saw an encouraging rally in the pair after yesterday’s stronger manufacturing PMI reading but once again the pair found solid resistance at the 1.55 level, as it did back in October on a number of occasions. The pair faces a tough challenge to break through here this morning and a failure to do so could prompt a move back towards last week’s lows. Yesterday’s strong rebound off those highs was far from bullish and I think it’s important that if the pair is going to gather any bullish momentum, those highs are tested and broken today. A failure to do so would look quite bearish to me.
RBA Leaves Door Open to Further Easing After Holding at 2%
The Reserve Bank of Australia left interest rates unchanged overnight at 2%, which was largely in line with expectations, although there had been some speculation that it may look to cut in the coming months in response to some of the largest banks raising mortgage rates. With inflation currently at the lower end of the RBAs target range and policy makers suggesting that the outlook could allow for further easing to support demand, I do see potential for another cut early next year.
The full RBA statement can be found here.
AUDUSD Rallies on RBA Announcement But Unlikely to Break 0.73
The Aussie dollar was quite volatile against the greenback around the announcement but has since found stability back around 0.72 and appears to be lining up another assault on its long-term trend resistance. It’s traded within a descending channel for more than a year now and a break above 0.73 would be a very bullish signal. That said, with the RBA leaving the door open to further easing and the Fed considering tightening in December, the fundamentals just don’t support such a bullish move and therefore I can’t see it having the support at this stage.