UK Continues to Show Promise

Riskier currencies have begun the week on a firmer footing, as official data from China revealed an improvement in manufacturing activity for May. Sterling has received some impetus following an expansion in the UK manufacturing activity after three straight months of contraction. However, with European data confirming a contraction in manufacturing activity, today’s manufacturing figure from the US is keenly eyed for further hints. With last week’s US economic data confounding traders over the pace of recovery, a plethora of key releases this week including non-farm payrolls data will prove crucial for risk sentiment, given its influence on the Fed’s policy decisions. The ECB and the BoE meetings also remain key events in this week’s session.

Pound Sterling – UK Markets

On Friday, the Pound lost ground against the US Dollar as upbeat US economic data heightened speculation that the US Fed might scale back its stimulus in the near term. However, Sterling has recouped most of its losses and is trading on a firmer footing against the greenback and the Euro in today’s session as data just out has revealed that manufacturing activity in the UK improved more than expected for May, providing relief to investors that the recovery remains on track. With tomorrow’s construction PMI and the all important services PMI data due mid week likely to post similar results, Sterling should maintain the upward momentum in this week’s trading session. Moreover, the BoE, in its monetary policy meeting, scheduled on Thursday is unlikely to resort to additional stimulus measures, given the recent evidence of green shoots in the British economy. Going forward, the BRC retail sales figures due overnight will be closely evaluated for insights into the consumption side of the economy. Apart from the BRC data, market participants will keep a tab on today’s US manufacturing data for further cues to risk appetite.

US Dollar – US Markets

Upbeat US economic data helped the greenback to regain momentum against its major peers in Friday’s trading session. Reports revealed that manufacturing activity in Chicago surpassed market expectations for May, while the final Reuters/Michigan consumer confidence index rose to the highest level in almost six years. Against this backdrop, a raft of key economic releases scheduled this week, especially the non-farm payrolls report, will be closely watched since the Fed Chief earlier indicated that rolling back a part of the current stimulus in the next few meetings remain a valid possibility, if recovery in the labour market sustains momentum. Meanwhile, the greenback has nudged lower against the Euro and the Pound in today’s trading session following upbeat Chinese manufacturing data. It remains to be seen whether today’s US ISM manufacturing report also echoes similar buoyancy. Any positive surprises on this front should aid the US Dollar to move higher, as it will further strengthen the case for the premature withdrawal of QE3.

Euro – European Markets

The common currency had come under pressure against the majors on Friday after unemployment in the Euro zone reached a record high of 12.2% for April, as the region continued to reel under pressure of the prolonged economic weakness due to the debt crisis. Though today’s manufacturing data across Europe have shown some improvement, it has done little to lift market sentiment towards Europe, as manufacturing activity in major Euro zone economies still remain in the contraction phase for May. Given the recent lacklustre economic reports and with inflation concerns remaining well anchored, the ECB meeting due later this week will remain a key event on traders’ radar. Moreover, with the ECB Chief hinting that the central bank remains open to the idea of negative interest rates, his post-meeting press conference will grab market focus for the ECB’s future policy moves. Meanwhile, on account of a light European economic calendar today, market sentiment is likely to be guided by news flow emanating from the US.

Other Currencies – Highlights

“Risk on” sentiment received a boost after the Chinese official manufacturing showed an improvement for May, leading the Australian Dollar to register gains against the US Dollar in today’s trading session. Additionally, data revealed that manufacturing PMI in Australia moved towards expansion territory for May, reflecting the recent efforts taken by the RBA to boost growth. Retail sales in Australia also rebounded for April, albeit at a slower than expected pace. The focus now shifts to services and construction PMI as well as trade balance data due later this week for further cues on the pace of recovery. However, the first quarter GDP data due later this week will grab most of market attention for insights into the nation’s economic performance. In the absence of major domestic economic news today, the US ISM manufacturing data will prove pivotal in deciding the direction of the Australian Dollar against the majors.