Pound muted amid lull in data
The pound (GBP) began the week on a subdued note, as confirmation of an expansion in the UK manufacturing PMI failed to lift it. Towards the end of Monday’s session, upbeat trading conditions allowed the increasingly risk-sensitive currency to find some support.
On Tuesday, Sterling wavered amid a lack of impactful macroeconomic data releases. This prompted GBP to lose ground to stronger assets but rise against weaker peers.
The final reading of the UK’s service PMI for May confirmed a slowdown in activity, which kept a lid on Sterling’s movements in mid-week trade.
A survey from the Bank of England (BoE) found that UK businesses anticipate slowing wage growth and cooling output price inflation in the coming months. This prompted GBP to trade without clear direction on Thursday, as it stoked BoE interest rate cut bets.
The end of last week saw the pound rally, as a volatile market mood allowed Sterling to press its advantage over weakened rivals.
This week, investor attention is likely to be on the latest UK GDP figures. In April, the UK economy is forecast to have stalled at 0%, which could weigh heavily on GBP by suggesting a short-lived economic recovery.
US dollar volatile amid mixed jobs data
Last Monday, the US dollar (USD) slipped against its peers followed a weaker-than-expected ISM manufacturing PMI. The index for May printed at 48.7, pointing to increased contraction in US factory activity.
The ‘greenback’ then managed to recover on Tuesday, due to a downbeat market mood. However, its gains were capped by a larger-than-forecast drop in job openings in April.
Midweek trade saw the US dollar waver, amid mixed economic data. While the ISM services PMI smashed forecasts and showed an expansion in sector activity, the latest ADP employment report pointed to a slowdown in job creation.
Further signs of slack in the US labour market weighed on the US dollar on Thursday, amid an uptick in jobless claims. However, rising US Treasury yields cushioned USD from steeper losses.
Friday saw the ‘greenback’ catapulted higher by stronger-than-expected non farm payrolls. In May, the US economy added 272,000 jobs – significantly above the 185,000 forecast. This sparked bets that the Federal Reserve may not cut interest rates as aggressively later in the year, lifting USD.
The Federal Reserve is due to deliver its latest interest rate decision on Wednesday. While no policy adjustment is expected, hawkish forward guidance could send the US dollar skyward.
Euro underpinned by hawkish ECB rate cut
The euro (EUR) began last week on the defensive, amid confirmation of a contraction in Eurozone manufacturing activity.
German unemployment rose above expectations on Tuesday, which prompted uncertain trade for the common currency. However, risk averse trade allowed the safer euro to remain steady against riskier assets.
Anticipation for the European Central Bank’s (ECB) interest rate decision began to build on Wednesday. This, in tandem with a larger-than-forecast decline in Eurozone PPI pressured the euro.
The ECB cut interest rates as expected on Thursday, but struck a hawkish tone in its forward guidance. The central bank stated that rates would be kept ‘sufficiently restrictive’ in order to drive down inflation. This saw markets scale back bets on future rate cuts, which lifted the euro.
As the US dollar surged on Friday, the euro suffered due to its negative correlation with the currency. Furthermore, divergence between a more hawkish Fed and the ECB applied additional pressure.
The latest eurozone industrial production data is due for publication on Thursday. An increase of 0.1% in activity is forecast for April, which could underpin the common currency.