Global Themes

Positive PMI's give pound hope
- Services boost pound, Brexit still weighs 
- Get ready for the ECB next week
- Dollar unchanged overnight
- Global sentiment improves


Services boost pound, Brexit still weighs
The key services PMI figure released yesterday was a boost for Sterling, beating expectations and allowing the pound to break the shackles against the US Dollar and climb above $1.34.

The PMI for May came in at 54.0, beating the forecasted 52.9 and was also higher than the April figure of 52.8. This was the fastest growth in services for 3 months, and though the gains against the dollar look tentative, it has at least breached a level that was a point of resistance throughout last week. GBP/EUR climbed back above the €1.14 handle and stretched to a daily high of €1.1462, but it was unable to continue the upward momentum.

This was the third consecutive positive PMI release in the UK, following the manufacturing data last week and construction on Monday. This has allowed GBP to put the brakes on its recent decline that exacerbated during May, where GBP/USD lost 3.43%. The upside gains do appear limited though with it being such an important month in regards to Brexit, with legislation before parliament next week and the EU summit at the end of June.

An interest rate hike in August has a current probability of around 40% (source: Reuters) following the data that we have seen, and one of the most ‘hawkish’ members of the Bank of England is giving a speech today. Ian McCafferty, who has been vocal in calling for rates to start rising now, is speaking at 5pm, and the recent economic releases could see him enforce this message further.


Get ready for the ECB next week
The Euro rallied against the US Dollar yesterday and is now 0.8% up for the week, as market participants speculate over the European Central Bank’s (ECB) meeting next week. The next ECB meeting could be pivotal as ECB policymakers could announce when they intend to end the quantitative easing (QE) program, according to euro-area officials familiar with the matter (source: Bloomberg)

The purchasing program is currently intended to run until at least September. Earlier this year, the Euro strengthened when market participants were buying the Euro on the back of speculation that the ECB would start winding down the QE program from September, and expectations of a 2019 interest rate hike. The Euro managed to reach $1.2555 against the dollar and €1.1148 against Sterling when it was at its strongest back in February. If the central bank does give an indication on when it expects to end the purchasing program, this could result in a strong Euro rally.

Yesterday, services data and retails sales both came in under expectation, however, with the story of the ECB in the spotlight the Euro was unaffected by this. Today ECB member Peter Praet will be speaking in Germany and market participants will be looking for any further hints on the above.


Dollar unchanged overnight
The US Dollar was little changed overnight with reports from the White House that US President Donald Trump was to hold separate talks with his Mexican and Canadian opposites, USD/CAD muddles around the C$1.29 mark. Despite US ISM non-manufacturing PMI beating expectation yesterday, the US dollar was unable to find significant support.

With no economic data from the US today, market participants will most likely trade on the news that the ECB could announce the end of its QE at next week’s policy meeting, which has seen the Euro rally. EUR/USD has broken through the $1.17 level and remains on an upward trajectory. However, it could be argued that this rally is short term, and the dollar is still seen as the more favourable currency. 


Global sentiment improves
Commodity-currencies such as the Australian Dollar, New Zealand Dollar and Canadian Dollar have started Wednesday morning on the front foot against their other major currency peers.

The ongoing surge in oil prices and higher Asian equities have contributed to the move. Having languished near 4-month lows on Monday, GBP/AUD clawed back most of its losses yesterday before running into resistance around AUD$1.76. This morning the pair faces downside risk once again, flirting with the AUD$1.75 support, as Australia’s GDP figure, released first thing, showed that growth in Q1 this year rebounded to 3.1% y/y.

With the calendar thin on data today, it looks like we could witness a risk-on session. This means investors could pump their money into more risky currencies and move away from safe bets like the Japanese Yen, which has already been under significant selling pressure over the past week. Both GBP/JPY and EUR/JPY have rallied over 2% and 3% higher respectively, over the past 7 days.  

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