UK Economic Recovery on Track

The just out revised first quarter UK GDP report has confirmed the steady growth trend witnessed in the nation over the past one year. In the wake of an improving economy, some BoE officials also seem inclined towards raising interest rates sooner, as revealed by yesterday’s BoE minutes. Against this backdrop, it remains to be seen how long the BoE Governor, Mark Carney, manages to influence policymakers’ views before more voices of dissent begin to crop up. On the global front, today’s weak European manufacturing PMI numbers are likely to strengthen the ECB’s resolve towards using unconventional monetary policy tools next month. In the US, following yesterday’s supportive FOMC minutes, some crucial economic data today will keep market participants interested.

Pound Sterling – UK Markets

The revised first quarter domestic GDP report just out has reaffirmed that the UK economic recovery is on track, buoyed by rising private consumption and steady business investment. However, government borrowings rose unexpectedly for April, thereby putting further pressure on the UK public finances. With the GDP report unable to offer any upside surprises to markets, the Pound has subsequently moved lower against the majors in today’s trading session. Sterling briefly flirted with the 1.69 level against the US Dollar yesterday following the release of the minutes of the BoE’s last policy meeting and buoyant retail sales numbers, but pared some of its gains later in the day. The BoE minutes revealed first signs of division among policymakers with regards to the timing of a revision to the benchmark interest rate, strengthening prospects for an earlier than expected rate hike. Further, the annual UK retail sales for April registered the highest growth since January 2002, boosting market sentiment towards the Pound. Later today, the CBI industrial trends report will be closely eyed by Sterling investors for further direction.

US Dollar – US Markets

The greenback pared some of its gains against the Euro in yesterday’s trading session after the FOMC minutes indicated that policymakers continue to see signs of improvement in the overall economy but remain averse to raise interest rates any time soon. However, the FOMC minutes seemed to indicate that members of the rate-setting committee began to lay the groundwork for an eventual withdrawal of the current stimulus measures as fresh comments from few officials revealed an intensifying discussion over exit-strategy details. Meanwhile, the US Dollar continued to trade in a tight range against the Euro this morning, as traders remained unperturbed following the release of weak manufacturing PMI data from major Euro zone economies. Going forward, some crucial economic releases from the US could potentially alter the trend in currency markets. The PMI figures from the US will be closely watched to gauge the overall trend from the manufacturing sector in the second quarter along with initial jobless claims numbers. Moreover, with the latest housing sector indicators offering mixed signals, existing home sales data scheduled later today will be watched for greater clarity on signs of recovery in the sector.

Euro – European Markets

The common currency slid against the majors yesterday amid uncertainty over the outcome of the European Parliament elections. Market participants fear that the elections could possibly expose rifts over the region’s austerity measures, as anti-EU parties are likely to perform well. Although the single currency nudged higher against the greenback following the release of the FOMC minutes yesterday, the Euro continued to hover below the 1.37 mark against the US Dollar in today’s session. The latest PMI readings revealed that manufacturing activity in France, Germany and Euro zone faced headwinds for May. Although German manufacturing activity witnessed a slowdown in growth for the current month, the growth in the services sector remains robust, thereby exhibiting some resilience. In the absence of any major domestic economic release today, market participants remain watchful of cues from the US for further direction. Besides, with uncertainty over the European Parliament elections stoking nervousness among investors, developments on this front during the next few days is also likely to have a bearing on the Euro against the majors.

Other Currencies – Highlights

The New Zealand Dollar is trading on a firmer footing against the majors this morning following the release of domestic inflation expectations and Chinese economic data earlier today. The Reserve Bank of New Zealand indicated that inflation expectations in the nation were marginally higher for the second quarter, but remained fairly stable. However, in the wake of rising domestic inflation expectations, prospects of a third successive rate hike by the RBNZ next month have certainly been boosted. Additionally, better than expected Chinese manufacturing PMI data further supported the Kiwi Dollar against the majors in today’s trading session. With little to track in terms of domestic macro releases for the rest for the week, news flows emanating from both sides of the Atlantic will prove crucial for the New Zealand Dollar against the majors in the near term.