US Dollar to Rise if Services ISM Boosts Fed QE Taper Speculation

The US Dollar is likely to rise if an improved non-manufacturing ISM report boosts speculation about a September cutback in the size of the Fed’s QE effort.

Talking Points

Pound May Rise on Services PMI But Follow-Through Likely to be Limited
US Dollar to Advance if Non-Manuf. ISM Print Boosts “Taper” Speculation
Yen Rose on Risk Aversion, NZ Dollar Sank on China Import Ban in Asia

July’s UK Services PMI report headlines the economic calendar in European trading hours. Expectations call for the print to show the pace of growth in the non-manufacturing sector accelerated for the seventh consecutive month, reaching the fastest rate since February 2010. The outcome may erode dovish BOE policy expectations and boost the British Pound, although lasting follow-through seems unlikely before the central bank’s Quarterly Inflation Report crosses the wires later in the week. Traders are looking to the publication for clues about the MPC’s take on “forward guidance” as a new policy tool.

Later in the day, the spotlight shifts to the US ISM Non-Manufacturing Composite data point. Economists are penciling in a push higher to 53.1 in July from 52.2 in the prior month. The service sector accounts for nearly 80 percent of US employment and a pickup here may be interpreted as bolstering the probability of a reduction in the size of the Federal Reserve’s monthly asset purchases at September’s FOMC meeting. Such an outcome is likely to be broadly supportive for the US Dollar. We have entered short EURUSD.

The Japanese Yen outperformed in overnight, rising as much as 0.6 percent on average against its top counterparts, as risk aversion gripped Asian markets and weighed against sentiment-linked bets including carry trades funded in terms of the perennially low-yielding currency. The MSCI Asia Pacific regional benchmark stock index fell in the wake of Friday’s disappointing US jobs report. The New Zealand Dollar proved weakest on the session, down as much as 1.2 percent against the majors, after China announced a ban on the import of dairy products from the island nation over the weekend.

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