by Adam Solomon
Sterling / Euro and US Dollar
The Pound rallied to a high above 1.65 against the U.S Dollar yesterday, as the global improvement in risk appetite spurred demand for higher-yielding assets and reduced demand for the so-called safe haven currencies. UK stocks surged higher for a fifth consecutive day, representing the longest winning streak in two months.
The improvement in global stock markets stemmed from speculation that European Union leaders will step up aid to Greece and that an expanding global economy will propel earnings. The FTSE 100 Index was up 0.9% by the close of the European session last night, while crude oil prices climbed more than 1.5%.
The possibility that Greece won’t have to restructure its debt has also helped the Euro, as the single currency traded back towards 1.14 against the Pound and 1.4450 versus the Dollar. Speculation about Greece and the ongoing issue with sovereign debt in the region dragged stocks down by 1.7% over the past two months and the recent improvement will be treated with caution.
UK bonds and the Pound rallied last week, as investors sought a diversification away from Euro-denominated assets, amid renewed concerns over the sustainability of a number of high-deficit region in the Euro-zone. The UK currency may extend its recent rally against the U.S Dollar towards 1.6750 should the market get above the May 11th high of 1.6520.
The resurgence in the Pound will be largely driven by interest rate speculation with the MPC debating the timing of the first increase. The panel has been split three ways on whether to implement an increase in borrowing costs to tame inflation, but one member Andrew Sentance, who has voted for a 50 basis point increase for the past three months has now left the committee.
UK consumer prices have surged higher towards the highest level in two-years and the BoE governor Mervyn King has warned that inflation will probably breach the 5% level over the coming months. Nevertheless, the BoE face a difficult balancing act and the majority of the MPC are concerned that a rate hike at this stage of the fragile recovery could plunge the economy back into the depths of contraction.
The British Chambers of Commerce reported earlier this week that it has pushed back its forecast for the first increase in UK interest rates to August from May and cuts it growth prediction for the year to 1.3% from 1.4%. The focus this morning will fall on the CIPS manufacturing PMI, which is expected to ease back in the official figures for May, while UK mortgage approvals probably remained largely unchanged for the month.
Euro / US Dollar
The U.S Dollar exchange rate declined to the lowest level in three weeks against the Euro yesterday, before data today is expected to show that the U.S private-sector hired fewer workers in May, while manufacturing output softened. The Dollar slumped against 13 out of the 16 most actively traded currencies, as the ADP employment report is expected to show that job growth stalled and provide an insight into non-farm payrolls.
A weak employment report and soft payrolls data would increase concerns about the U.S economic outlook and push the Dollar lower against the majors. The ISM factory index probably fell to 57.1 in May, the lowest level since October, fuelling concerns that the key components of the U.S economy as slowing, pushed a rate increase further into the distance.
The Australian Dollar strengthened against all of the majors yesterday, after a government report showed that the economy shrank by less-than-expected in the first quarter, increasing the prospect of a near-term increase in borrowing costs. Gross domestic product contracted just 1.2% in the first quarter and the Aussie Dollar climbed against the Dollar.
EU 08:58 – Markit Manufacturing PMI (May)
U.K 09:30 – CIPS Manufacturing PMI (May)
U.K 09:30 – Mortgage Approvals (April)
U.S 13:15 – ADP Employment (May)
U.S 15:00 – Construction Spending (April)
U.S 15:00 – ISM Manufacturing PMI (May)