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Sterling poised for another roller coaster

Sterling poised for another roller coaster

GBP 
UK PMI services index fell more than expected at 53.8 for May from 55.8 in April. There was some evidence that election uncertainty has had a negative impact on confidence, and even evidence of inflationary pressures easing, supporting business confidence and calming Bank of England fears surrounding the inflation outlook. Overnight, the BRC retail sales data recorded a 0.4% decline in like-for-like decline in the year to May. 

Election opinion polls continue to show a variance in expected outcome, and that variance will generate volatility. Sterling was resilient during Monday, although the move back above 1.2900 to 10-day highs against the Dollar was assisted by a weaker US currency as the Euro found support below 1.1500. Overall Dollar weakness again provided an important cushion for the UK currency. 

USD

US underlying data held firm yesterday as new orders growth strengthened to a three-month high. The employment index also strengthened strongly from the April reading, solidifying confidence in the labour market on the back of the weaker than expected May employment report. That said, PMI manufacturing index was revised down to 53.6 from the flash reading of 54.0 and the ISM non-manufacturing index declined to 56.9 from 57.5 for April.

There was, however, a decline in the inflation component which dipped below the 50.0 threshold for the first time in 13 months as upward pressure on input prices eased. The prices component maintained speculation that the Fed could scale back its medium-term plans to continue policy tightening. The Dollar overall drifted to fresh six-month lows on Tuesday as the Euro edged back to the 1.1280 resistance area.

EUR

Yesterday saw the final Eurozone PMI services-sector index for May revised marginally higher to 56.3 from the flash reading of 56.2. The overall composite index was confirmed at a six-year high which maintained confidence in the outlook.

The markets are waiting for Mario Draghi to signal a shift in forward guidance but his reluctance to move quickly generates inevitable uncertainty. The Euro remains underpinned by a broad-based view that the European Central Bank will shift to a more aggressive tone by dropping its pledge to inject further stimulus if needed. All this is against the backdrop of the incipient recovery in the region, although inflation pressures still remain subdued. Sticking with the status quo will disappoint.

Data To Watch:
3pm USD JOLTS Job Openings

This week sees the general election in the UK. It’s a huge risk event for currency. Watch Adrian Jacob, Director, discuss the outcome possibilities, and the effect it has on Sterling.

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