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Spectre of UK rate hike returns

Spectre of UK rate hike returns

GBP
Service sector PMIs beat forecasts and rose to a three-month high of 54.0 for May, up from 52.8 in April. New order growth was still subdued amid fragile consumer spending and persistent Brexit uncertainty. Employment growth was also subdued with underlying skills shortages and strong upward pressure on costs to blame. IHS Markit stated the data suggested Q2 GDP growth of 0.3-0.4%, lower than the Bank of England forecast but possibly still enough to trigger an August rate hike.

The Pound was still hampered by Brexit uncertainty and with speculation of major divisions within the government, but reports that the Labour Party were pushing for a softer Brexit deal meant Sterling gained overall. There were highs above 1.3400 against the Dollar while the Euro retreated to below 1.1430.

USD

The US Dollar is back in the green after keeping a low profile at the beginning of the week. The USD Index is up 0.15% whilst commodity currencies are coming under selling pressures, keeping the Dollar high against its peers. Uncertainty over NAFTA and sliding oil prices are the main drivers for the gains.

The ISM non-manufacturing index increased 1.8pp to 58.6 in May, above expectations. The strength across subindices was broad-based and is consistent with a rebound in other business surveys during the month. Moreover, the May survey punctuates a string of solid data for May that indicates an acceleration in US economic activity.

Market focus today will likely turn to the US Trade Balance figures due at 13:30 London Time, and a miss in either direction for the headline figure, expected at -$49 billion, could cause the Dollar to move.

EUR

Eurozone services PMIs for May were revised down slightly to 53.8; the lowest reading for 18 months. Italian Prime Minister-designate Giuseppe Conte promised a radical government; his comments on social justice, minimum wages and a basic income reinforced concerns over conflict on fiscal policy with the EU Commission.

After failing to hold above 1.1700, the Euro retreated to lows near 1.1650 against the Dollar. Late in the afternoon, sources indicated that the European Central Bank’s (ECB) June meeting was live to discuss the quantitative easing exit and the Euro rallied firmly. The single currency also gained support from further comments from Conte that the Italian government had no plans to leave the Euro. Conte won a Senate confidence vote and the Euro held above 1.1700 on Wednesday as the Dollar index faded.

Data to watch:

00:00 AUD RBA Assistant Governor Bullock Speech
02:30 AUD Gross Domestic Product (QoQ) (Q1)
02:30 AUD Gross Domestic Product (YoY) (Q1)
07:30 EUR ECB’s Praet Speech
08:15 CHF Consumer Price Index (YoY) (May)
09:00 EUR ECB’s Praet Speech
11:40 GBP MPC Member Tenreyro Speech
13:30 USD Trade Balance (Apr)
13:30 USD Nonfarm Productivity (Q1)
13:30 USD Unit Labor Costs (Q1)
13:30 CAD International Merchandise Trade (Apr)
15:00 CAD Ivey Purchasing Managers Index s.a (May)
15:00 CAD Ivey Purchasing Managers Index (May)
17:00 GBP MPC Member McCafferty speech
23:30 AUD AiG Performance of Construction Index (May)

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