UK Manufacturing Expands at a Slower Pace

Although UK manufacturing activity continued to remain in expansion for May, the soft reading has heightened expectations that the BoE might continue to support the domestic recovery by maintaining interest rates at historical lows. Additionally, mortgage approvals continued to ease further as high house prices kept consumers away from making new purchases. Across Europe, weak manufacturing numbers and a likely easing trend in German inflation later today would add pressure on the ECB to unveil fresh accommodative measures to combat low inflation in the Euro bloc. Across the Atlantic, today’s ISM report is expected to show that manufacturing activity in the nation improved in the wake of mostly positive regional manufacturing prints released earlier in May.

Pound Sterling – UK Markets

Sterling is trading in a tight range against its major counterparts this morning after data just released indicated that UK manufacturing PMI eased marginally for May, in line with market expectations, although the sector continues to exhibit strength. Against this backdrop, this week’s domestic services and construction sector reports will generate market interest and are likely to show a similar trend. Another economic report showed that mortgage approvals in the UK declined for April, as the BoE resorted to stricter lending norms to control overheating in the domestic housing market. Going forward today, the US ISM manufacturing activity report along with German inflation is likely to provide direction to the Pound in the latter half of the trading session. Additionally, market participants will look forward to the BoE monetary policy meeting due later this week for further hints on future policy stance. With no major domestic macroeconomic on Friday, Sterling advanced against the greenback following the release of mostly weak economic reports in the US.

US Dollar – US Markets

Mostly downbeat macroeconomic reports in the US weighed on the greenback against most of its major peers on Friday. Data indicated that the Reuters/Michigan consumer sentiment index dipped for May due to a gloomy view about income growth. Furthermore, personal spending dropped for the first time in a year for April as demand eased, thereby suggesting that price pressures in the US economy are increasing. The US Dollar has moved higher against the common currency in today’s trading session following weak European manufacturing PMI data. In the wake of largely upbeat regional manufacturing reports in the US for May, today’s ISM manufacturing report is also likely to echo a similar trend, thereby strengthening views that the US economy is on the path of steady recovery. Additionally, today’s German consumer price inflation reading will attract market attention ahead of the ECB monetary policy decision scheduled later in the week. Apart from this crucial meeting, market participants are likely to keep a close watch on the US non-farm payrolls report for greater clarity on the overall trend in the labour market during the second quarter.

Euro – European Markets

Data released earlier today indicated that the manufacturing activity slowed in most of the European peripheral economies for May, leading the Euro to trade under pressure against its major peers this morning. With Friday’s data indicating that Italian and Spanish consumer price inflation ticked lower, today’s German inflation numbers are likely to show a similar trend for May. These figures strengthen the widely held belief that the ECB might unveil fresh stimulus measures in its monetary policy meeting scheduled later this week to counter deflationary pressures and boost credit growth in the Euro area. Additionally, continued tensions in Eastern Europe might weigh on investors’ sentiment. The Euro advanced against the greenback on Friday following mostly weak macroeconomic reports released in the US. However, easing inflation in European regions and an unexpected monthly decline in German retail sales capped gains in the single currency. Additionally, Ignazio Visco, the ECB official, indicated that the central bank is ready to use unconventional policies if inflation forecasts continue to remain below the central bank’s 2% target over the next two years.

Other Currencies – Highlights

The Aussie Dollar dropped against its major peers this morning after a report revealed that approvals for construction of new homes in Australia dropped for the third consecutive month for April. Separately, the TD securities inflation report indicated that the annual consumer price inflation will tick higher for May, thus raising expectations that the Reserve Bank of Australia might start raising interest rates soon. Against this backdrop, tomorrow’s RBA monetary policy meeting will attract market attention for further direction. Meanwhile, data released over the weekend indicated that manufacturing activity in China expanded for May, suggesting that the world’s largest economy recovered from the recent setbacks. With no domestic decisive triggers for today, the US ISM manufacturing report will keep market participants on their toes. Apart from the RBA policy meeting, domestic retail sales and GDP numbers due later this week will prove crucial for the direction of the Aussie Dollar against the majors.