Italian Hung Parliament
February’s UK PMI services index rose to 54.5 from 53.0 in January, easily surpassing consensus expectations of 53.3. This print was the strongest for four months and orders increased at the fastest pace since May last year. Employment growth strengthened to a five-month high while the rate of price increases slowed to a six-month low.
Whilst the data helped underpin Sterling, attention was focussed initially on Eurozone political developments and global trade tensions. Theresa May stated that a transition deal was close which supported sentiment and UK bond yields increased during the day. All of which triggered Sterling buying with highs near 1.3880 against the Dollar and 1.1235 against the Euro, but the Pound failed to hold peak levels.
BRC data reported a 0.6% annual gain in like-for-like retail sales, maintaining expectations of subdued spending. The Pound opens this morning around 1.3821 against the Dollar and, against the Euro, circa 1.1204.
US PMI services printed in line with the flash reading of 55.9; anything above 50 signalling expansion. Input prices rose at the fastest pace since June 2015 with the output prices index registering a five-month high. The ISM non-manufacturing index declined only marginally to 59.5 from 59.9 previously while the orders component strengthened. Employment increased at a slower pace while the prices index held above 60.0.
US data maintained expectations of robust growth which provided some Dollar support, but the currency was unable to gain fresh traction as the Euro strengthened to the 1.2350 area before consolidating as the dollar index held below 90.0.
The Greenback is trading in a better mood today as concerns over a global trade war seem to have subsided amidst some resistance amongst Republicans to the recently announced measures by President Trump. This was coupled with threats of retaliation from Asian and European trade partners. Additionally, yields of the key US 10-year reference rebounded late yesterday evening, somewhat accompanying the upward move by the Buck.
In the US data space, January’s Factory Orders are due later in the session, followed by the speech by FOMC’s permanent voter Brainard.
February’s Eurozone PMI services reading was revised down to 56.2 from the flash reading of 56.7, a four-month low with some evidence that capacity constraints were limiting growth. Upward pressure on costs eased slightly, although output price inflation remained close to nine-year highs with strong price gains in Germany.
The Italian election resulted in Lega leader Salvini rejecting the possibility of a coalition deal with the 5 Star movement; preferring a centre-right coalition which eased market fears to some extent. He also stated that financial markets had nothing to fear but he again criticised the Euro. Coalition talks could take several weeks to produce a government, so uncertainty will remain in the short term.
The Euro found support on approach to 1.2280 against the Dollar and moved back above the 1.2300 level as immediate market concerns eased. The Euro has shifted lower against the US Dollar at market open, and the macro calendar is looking thin for the Euro, at least until Eurozone GDP figures drop at 10:00 GMT tomorrow.
Data to watch:
12:30 US Fed’s Dudley Speech
15:00 US Factory Orders (Jan)
18:15 UK BoE’s Andy Haldane Speech
21:35 AUS RBA Governor Philip Lowe Speech
22:30 US Fed’s Brainard Speech