Today’s macro highlights:
UK data impresses but Sterling rally flounders.
Yesterday proved to be something of a mixed session, with UK construction PMI data beating expectations, whilst Eurozone PPI readings and US factory orders both fell short. However despite all this, it was the Pound which came off worst, with the run of gains we’ve seen over the last week coming to an abrupt end. There was one lower level UK survey out yesterday into the state of manufacturing, which flagged a number of concerning factors such as a slow down in exports, a worsening outlook for recruitment and investment and it also contained downward revisions for growth forecasts. This EEF/BDO report does seem to have cast something of a shadow over Sterling and is a timely reminder of the fact that despite the political turmoil we’ve seen on the continent in the last couple of weeks, the UK still has the thorny issue of Brexit to manage.
UK Services PMI is set for release this morning and an impressive figure here may offset some of that downside from the EEF/BDO report of yesterday. What the market is looking for is any assurance that the economic slowdown at the start of the year can be attributed to the unseasonably cold weather. An upbeat figure in today’s reading - due at 9.30am - would have the potential to give some support to the Pound, but gains may struggle to find longevity.
Eurozone Retail Sales are due at 10am BST and there’s the potential for these to contain some indication over the ECB’s intention to tighten monetary policy. The resolution of the Italian political situation saw the odds of the ECB making a rate hike in the summer of 2019 jump significantly. We’re still a long way from that, the bond buying arrangement needs to be shut down and the Eurozone has to avoid any rampant public spending plans being tabled by member states. The idea that consumers are spending more readily would however add weight to the need for policy tightening, lifting the common currency as a result.
Rounding out the trifecta of high profile releases for the day will be US PMI print at 2.45m BST. These are expected to be surging and again with the FOMC set to meet next week, the number will be under scrutiny. Markets are as good as convinced that the Fed will hike rates this month, so with this now priced in, the risk could be on the downside. Any shortfall from the expected - and ambitious - 57.6 could therefore result in some short term weakness for the dollar.
Note that last night, Parliament agreed to vote on June 12th over the House of Lords proposed amendments to the Brexit bill. This has the potential to add further uncertainty to GBP crosses in the next week. The outcome of this vote could offer some real clarity over how any customs union will work.
The pair has dropped back to the 1.3300 level and the uncertainty of the next seven days ahead of the Parliamentary vote over Brexit could serve to limit upside for GBP/USD. A move back below last week’s lows - however temporary - is certainly possible.
Still struggling to sustain a break above 1.1700 and the risk premium that’s being factored in over the potential for relations between Rome and Brussels to deteriorate quickly is likely to continue to weigh, even if Eurozone data continues to impress. Any shortfall in data from the US could however help drive the pair back towards the 1.20 mark.
Yesterday’s meaningful retreat has left the pair again threatening to give up all hope of sustaining even a vague up-trend. Uncertainty over how the Brexit vote will map out in parliament next week could feasibly precipitate a return to lows not seen in 18 months below the 1.1200 level.
Did you know….
Today’s UK Services PMI reading from Markit and the CIPS is one of the most closely followed economic indicators in the UK, as a result of the country’s services-led economy. Hundreds of senior purchasing managers from companies across a wide range of sectors are surveyed. Factors such as employment, prices and inventories are taken into account, with a measure of 50 indicating break even. Above 50 points to economic growth, whilst below 50 suggests the economy is contracting. The Services PMI reading hit an all time low of 40.1 towards the end of 2008, at the depths of the global financial crisis. The highest reading of 62.5 was recorded five years later.