Doves in US Fly High

Although the clamour to scale down asset purchases in the US is getting louder, the ISM manufacturing data released yesterday highlighted that the economic revival remains fragile and more evidence will be required to support arguments in favour of tapering QE3, leading riskier currencies to edge higher. At home, signs of revival continued to emerge, as the latest PMI indicators confirmed signs of improvement in the British manufacturing and construction sectors. Additionally the BRC data offered positive signals from the retail sector, reinforcing hopes that the recovery is gaining momentum in the second quarter. In the absence of major macro releases today, trade balance data in the US is likely to grab modest market attention.

Pound Sterling – UK Markets

Upbeat UK manufacturing PMI coupled with weak manufacturing data from the US helped the Pound to successfully breach the 1.53 mark against the US Dollar in yesterday’s trading session. Data indicated that the UK manufacturing sector grew at its fastest pace since March 2012, bolstering hopes that the nascent economic recovery might gain momentum in the coming months. Additionally, Sterling received a boost, as lacklustre US manufacturing data watered down speculation of the Fed rolling back its stimulus measures. In today’s trading session, the Pound has managed to hold on to its gains against the greenback, as figures just out have revealed that construction activity in the UK entered an expansion phase for May on the back of a swift recovery in the housing market. Moreover, the BRC reported that like-for-like retail sales in the UK rebounded more than forecast for May amid temporary discounts that lured customers. In this context, the BRC shop price inflation data due overnight will be watched closely for gauging the overall inflationary pressure in the economy. However, the focus is squarely on the services PMI data due tomorrow for further insights into the second quarter performance.

US Dollar – US Markets

The US Dollar moved sharply lower against its major peers in yesterday’s trading session after the ISM report portrayed a dismal picture of the US manufacturing sector. Data showed that the nation’s manufacturing activity unexpectedly moved into the contraction phase for May, marking its lowest level since June 2009, largely hurt by weak business spending and slow global recovery that undermined the nation’s export demand. With the closely watched report heightening speculation of the Fed continuing with its current stimulus in the foreseeable future, the Fed Atlanta Chief, Dennis Lockhart, echoed similar views by opining that the economy is not strong enough to justify a reduction in bond buying. With a relatively light domestic economic calendar today, trade balance figures due later in the day will be closely scrutinised for an overall picture about the global economy. Going forward, market participants will keep an eye on factory orders and the ISM non manufacturing data due tomorrow to ascertain whether the nation can sustain its economic recovery for the second quarter. However, non-farm payrolls report on Friday will prove crucial for the greenback as it will provide some clarity surrounding the timing of QE3 withdrawal.

Euro – European Markets

Traders increased their bets on high yield currencies yesterday after dismal US manufacturing data dispelled fears of the US Fed altering its pace of asset purchases in the near term, leading the single currency to nudge above the 1.30 mark against the US Dollar. However, with the Euro zone macro data offering minimal signs of a revival, it remains to be seen how long the single currency can hold to its gains. Moreover, improving economic prospects in the UK economy has kept a tight lid on the common’s currency’s upside against the Pound in today’s trading session. With Germany, struggling to regain momentum, the IMF lowered its 2013 economic growth forecast for the nation to 0.3% from 0.6% citing weak Euro zone economy hampering the growth outlook. However, the ECB’ s executive board member, Benoit Coeure, has opined that the Euro zone economy will recover by the end of this year, though it is currently sailing through rough waters. In the absence of major European economic data, news flow emanating from the other side of the Atlantic will hold prominence in today’s trading session.

Other Currencies – Highlights

The Japanese Yen has registered losses against the high yield currencies this morning as traders flocked to riskier assets after weak US manufacturing data eased concerns about the Fed tapering its bond buying programme in the near future. Moreover, the currency’s upside seems limited as the Japanese Prime Minister, Shinzo Abe, an ardent advocate of loose monetary policy, indicated that the Bank of Japan will continue with its economic growth strategy despite recent market volatility. On macro front, data released earlier today revealed that labour cash earnings in Japan grew for April, indicating that the central bank’s moves to boost the economy are showing signs of progress. With a lacklustre week ahead in terms of domestic economic releases, the Japanese Yen will monitor overseas events, especially events unfolding in the US, for further direction.