BoE Expected to Hold Interest Rate
The Bank of England, in its monetary policy meeting later today, is expected to hold interest rates steady, as recent domestic economic data including the slide into deflationary territory have raised doubts over the ability of the economy to rebound strongly from the weakness witnessed in the first quarter. Going forward, tomorrow’s survey report on consumers’ inflation expectations is likely to attract significant market attention.
In Europe, focus will solely remain on Greece and developments arising from bailout talks with its international creditors amid the absence of any key economic releases. Across the Atlantic, the unemployment claims data will attract close attention ahead of tomorrow’s non-farm payrolls report.
Pound Sterling – UK Markets
The Pound traded on a weaker footing against most of its currency counterparts yesterday after weaker than expected services PMI print indicated a slowdown in Britain’s most significant economic sector. Recent UK data have provided an unclear picture about the health of nation’s economy, thus making it difficult to gauge the direction of Sterling against its major peers. A PMI survey earlier this week had revealed lackluster activity in the nation’s manufacturing sector, while mortgage approvals climbed the most in six years for April.
The uncertain economic climate is likely to lead to a cautious approach by BoE officials in today’s monetary policy meeting. It is widely expected that the central bank will keep its interest rate steady at 0.5%, as recent macro indicators have fuelled doubts about UK’s economic recovery momentum in the second quarter. Additionally, the Organisation for Economic Co-operation and Development cut the nation’s growth forecast to 2.4% from its earlier forecast of 2.6%. Going forward, investors’ attention is likely to shift towards consumer inflation expectations survey report which is scheduled for release tomorrow.
US Dollar – US Markets
The US Dollar edged higher against the Pound yesterday, while it slumped against the shared currency. Investor sentiment towards the greenback improved after data showed that trade deficit in the US narrowed more than market expectations for April helped by a drop in imports. Separately, payrolls processor ADP indicated that companies picked up hiring in May after a pull back in the previous month. These upbeat releases were followed by two reports of nation’s service sector which signaled a slowdown in business activity largely due to the stronger US Dollar, recent rise in oil prices and lack of foreign demand. Separately, Fed’s latest Beige Book yesterday indicated that the US economy will continue to expand at a "modest" to "moderate" pace, considering the weakness in energy industries and the impact of the US Dollar on nation’s exports.
Later in the day, a weekly report on jobless claims in the US will attract market attention ahead of tomorrow’s key payrolls report.
Euro – European Markets
At the ECB’s latest monetary policy meeting yesterday, the central bank chief, Mario Draghi, sounded optimistic about the shared currency union’s growth prospects as he indicated that the bank’s stimulus measures have worked their way through the economy and have supported Euro zone’s modest recovery. He also raised the ECB’s inflation forecast for the year to 0.3% from zero, amid signs that the region’s risk to a prolonged period of a drop in prices was limited. The Euro moved above the 1.12 mark against the US Dollar yesterday, following Draghi’s upbeat comments. In a separate development, Greece warned that it might skip an IMF debt payment this week, however the nation’s creditors assured they were ready for a compromise to avoid a default. In macro news, the final Euro zone’s services PMI posted a better than estimated reading for May and the pace of hiring in the services firms increased at the fastest pace in four years.
Amid absence of key macro releases in the Euro area today, investors will eye the second estimate of Euro zone’s first quarter GDP tomorrow.
Other Currencies – Highlights
The week has been a very eventful one for the Australian economy and also for the Aussie Dollar. The local currency was trading firmer against its key peers since the RBA left the interest rate steady and the first quarter GDP topped market expectations. However today, the Australian Dollar has slumped below the 0.78 mark against the US Dollar, fuelled by softer than expected economic numbers that came out overnight.
Flat retail sales and Australia’s largest ever trade deficit on record for April have eroded most of the recent optimism built on the back of stronger than expected first quarter growth figures. Investors were expecting a rebound in retail sales reading today, however data showed that an increase in sales of furniture, clothing and restaurant services were offset by a decrease in demand for liquor, footwear and recreational goods. Australia’s trade deficit widened almost three times more in April as harsh weather conditions and falling commodity prices impacted the value of exports sharply. Going forward, the Aussie Dollar could further weaken against the greenback if tomorrow’s US non-farm payrolls surpass estimates.