Caution ahead of ECB policy meeting
The UK Services Purchasing Managers Index for May edged higher from estimates but thankfully still revealed a sharp slowdown from April’s reading of 58.9. Increases in costs were the strongest since the survey’s started (in ‘96) and prices charged by service providers grew at the fastest pace on record, both of which helped erode business confidence. Reports of an economic support package on the way helped offset any selling caused by our Prime Minister’s insistence to carry on in the role.
The Pound dropped in the morning but bounced off 1.2450 against the Dollar and quickly rebounded to the 1.2500 area.
The UK 10-year government bond yield held close to 8-year highs on Tuesday and risk appetite recovered which helped drive demand for the Pound and triggered a fresh round of short covering (closing bets against the Pound). Overnight, Sterling peaked near 1.2600 against the dollar while the Euro retreated to test 1.1765 from highs at 1.1655.
Weaker risk conditions this morning means Sterling opens near 1.2570 against the dollar. There will be further caution ahead of Wednesday’s ECB policy meeting with forward guidance from the bank very important ahead of the July meeting when interest rates are expected to increase. In particular, markets will be looking for hints on whether a larger 50 basis-point rate hike could be under consideration.