UK Economy on the Mend

The British economy is consistently treading the path to recovery, as the latest PMI data just out has revealed that the dominant services sector expanded at a faster pace for May. With the recent PMI data across sectors offering encouraging signs, the BoE is widely expected to maintain the status quo at tomorrow’s policy meeting. Across the Atlantic, the timing of a potential exit from QE3 should be clearer, as markets await critical economic indicators later today including the ADP employment and the Beige Book survey. Meanwhile, today’s services PMI across Europe have little to offer, with reports later today likely to confirm that the Euro zone remained mired in recession for the first quarter.

Pound Sterling – UK Markets

Sterling has moved higher against both the US Dollar and the Euro this morning as data just out showed that services activity, which accounts for a large portion of the nation’s output, continued to expand at a faster than expected pace for May. Moreover, with the housing sector continuing to gain traction, yesterday’s report indicated that construction activity in the UK moved into an expansion phase for the first time in seven months for May. Encouraging PMI numbers across manufacturing, services and construction sectors highlight that the UK economy is firmly on track to recovery, thereby diminishing the need for the BoE to introduce additional stimulus measures in its two day monetary policy meeting commencing today. Meanwhile, the BRC indicated that heavy discounts by retailers designed to lure customers into their shops led to a decline in shop prices for May, the first drop since September 2009. This has further validated data showing a rise in retail sales for the previous month. In the absence of major domestic economic news today, the Pound is likely to take direction from events unfolding in overseas markets, especially the US.

US Dollar – US Markets

The greenback is trading in a tight range against the single currency in today’s trading session. However, losses were capped, as two Fed officials, the Dallas and the Kansas City Fed Presidents, voiced concerns that the risk of the Fed’s massive stimulus programme might outweigh its potential benefits, thereby supporting speculation that the central bank could soon start tapering its asset purchases. Today’s raft of important economic releases in the US will shed further light on the timing of the withdrawal of QE3 and could prove decisive for the near term dynamics of the greenback against the majors. With the ISM services activity and ADP employment data was expected to show an improvement for May, market speculation of the Fed winding down its stimulus measures is likely to receive a further boost, thereby increasing the appeal of safe haven assets in today’s trading session. The factory orders report scheduled for release later today is also expected to grab market attention, given the recent deterioration in the ISM manufacturing PMI. However, the Fed’s Beige Book survey should steal the limelight today, as it will provide an indication about the overall health of the US economy for May.

Euro – European Markets

The single currency is trading on a weaker footing against the US Dollar in today’s trading session as PMI data across the major Euro zone economies have confirmed that services activity continued to remain in contraction territory for May. Meanwhile, markets are expected to keep a tab on the Euro zone first quarter GDP data due later today which is expected to show that economic recovery in the region remained elusive in the first quarter of 2013. Moreover, in line with the recent dire German retail sales report, the Euro zone retail sales data scheduled for release later today is also likely to echo similar concerns, thereby limiting the upside for the single currency in today’s trading session. With the Euro zone economy continuing to face substantial headwinds, markets look forward to the ECB’s policy meeting due tomorrow. Although the monetary policy stance is likely to remain unchanged, the ensuing press conference by the ECB President will be of key interest to market players, especially his comments on the idea of negative interest rates. Apart from the European economic data today, news flow emanating from the US will prove crucial for the direction of the single currency against the majors.

Other Currencies – Highlights

Disappointing GDP data has led the Australian Dollar to backtrack against its US counterpart in today’s trading session. The GDP report revealed that the Australian economy grew 0.6% sequentially for the first quarter of 2013, lower than market forecasts. Further exacerbating the situation, data released earlier today revealed that services sector activity in Australia plunged to a thirteen month low for May. Against the backdrop of weak macro data, market participants fear that an interest rate cut in the near future cannot be ruled out. Yesterday, the RBA Governor, Glenn Stevens, indicated that given the benign inflation outlook, the central bank remains open to further rate cuts should the economic situation demand. Going forward today, traders will keep a tab on developments taking place on both sides of the Atlantic for further direction to currency markets. Moreover, trade balance and construction PMI data in Australia due over the next two trading sessions will be gauged for further insights into the state of the economy.