Populist Italians finally form government
Although the UK PMI manufacturing index strengthened to 54.4 in May, above consensus forecasts of 53.5, new orders growth slowed, negating any Sterling impact. The data also revealed growing cost pressures, underpinning confidence in stronger second-quarter growth and modestly increasing expectations that the Bank of England will raise interest rates at the August policy meeting.
Sterling gained from Eurozone political concerns, but UK uncertainties hampered the Pound as the UK government floated a proposal to give Northern Ireland joint UK and EU sovereignty. Sterling still edged towards 1.3350 against the Dollar while the Euro retreated to near 1.1455. Latest CFTC data reported a small increase in net long, speculative positions, limiting the scope for Sterling gains unless UK fundamentals improve, although there was a small advance against the Dollar on Monday as markets anticipate UK data.
The Italian 5-Star/Lega coalition government secured Presidential approval for their populist government following agreement not to appoint the Eurosceptic Paolo Savona as Economy Minister. The Euro briefly dipped sharply following rumours that MEPs from Italian populist parties had backed a proposal to help countries leave the Eurozone and Germany ruled out Italian debt relief while Spanish Prime Minister Rajoy lost a confidence vote. The Dollar overall, however, failed to gain fresh traction and the Euro edged towards 1.1700 on market open.
Headline US employment data was stronger than expected with May NonFarm payrolls registering 223,000, above forecasts of 190,000, however, April’s data was revised downward. The unemployment rate declined to a fresh 18-year low of 3.8% from 3.9% as the participation rate declined slightly. Average hourly earnings increased 0.3% for the month compared with consensus forecasts of 0.2%, although the year-on-year rate matched expectations at 2.7% from 2.6% previously.
From a short-term perspective, the absence of negative surprises reinforced very strong expectations that the Federal Reserve would go ahead with the planned June interest rate increase. The data, overall, boosted confidence in the US outlook and the Dollar made measured net gains following the data. The ISM manufacturing index strengthened to 58.7 from 57.3 previously and above consensus forecasts of 58.2. The prices index increased to 79.5 from 79.3, the strongest reading since May 2011, maintaining evidence of stronger inflation.
Data to Watch:
02:30 AUD Retail Sales s.a. (MoM) (Apr)
09:30 GBP PMI Construction (May)
15:00 USD Factory Orders (MoM) (Apr)
18:00 GBP MPC Member Tenreyro Speech