Sterling recovers following impressive services activity data

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5 June 2018

thomasdodds

Sterling initiated a fairly sharp rally against its major peers this morning after a solid services PMI reversed almost all of the currency’s losses from Monday trading.

T
he UK currency had fallen across the board yesterday, as Brexit concerns clouded the outlook for the Sterling. Investors are sceptical that the UK government has proposals in place ahead of the EU summit later this month, while there was also pressure on Downing Street over the weekend to release papers outlining a ‘Doomsday Brexit’ scenario, should the UK leave the bloc without a deal in place.

Sterling did, however, jump by around half a percent this morning after the May services PMI leapt back to 54.0, versus the 52.8 recorded in April, well above consensus. This is a very encouraging sign given the sectors large contribution to the overall GDP, and tentatively suggests that the economic slowdown in the first quarter of the year could prove temporary. It also gives a fairly significant boost to the chances that we’ll see higher interest rates out of the UK this year, with the market now placing just under a 50% probability of a hike at the BoE’s August meeting.

We expect the Pound to continue to be well supported today, barring any surprises from elsewhere. MPC member, Cunliffe, could shift the Pound should he touch on monetary policy during his speech later this morning.

Higher US yields keep Dollar around six month high

The US Dollar was fairly steady against the Euro on Monday, stabilising on Tuesday morning, just below the six month highs it hit last week. A bump in US Treasury yields helped support the greenback, with the 10-year rate increasing back up to above 2.9%, around 20 basis points up over the past week.

Macroeconomic data was light on the ground out of the US yesterday. Factory orders missed expectations, falling by 0.8% in April, although this was mostly overlooked. This afternoon’s ISM non-manufacturing PMI should take on much more importance, and could lift the Dollar back to its recent highs should it materially beat consensus.

Monday proved to be a similarly quiet day in the Euro-area, with mostly second-tier data going largely under the radar. The data that we did see was largely disappointing. The investor confidence index was particularly weak, slumping to just 9.3 from 19.2. Sentix cited the recent political turmoil in Italy for the downturn. Meanwhile, this morning’s PMI data and retail sales came in almost bang in line with expectations, and the common currency was little moved as a result, continuing to hover around the 1.17 mark for the fourth consecutive trading session.