Markets await US employment figures as indicator for Fed's likelihood to taper Fed QE

Tom Tong05/Jun/2013Currency Updates

GBP

UK construction sector returned to growth after six dismal months of contraction, aided by an increase in the level of house building. The figure released was slightly over the expansion rate at 50.8 up from 49.4 the month before. House building was at its fastest for 26 months in May and this positive PMI survey adds to signs that the UK economy is recovering on the back of positive manufacturing sector data released yesterday.

British retail sales rebounded in May, exceeding its average growth rate over 2012 by 3.4%. Whilst not soaring through the roof, it is a credible performance from UK retailers with major drivers coming from online sales.

The central bank holds its June policy meeting on Wednesday and Thursday, with the likelihood that the BoE will refrain from more bond-buying as we have forecast. The general consensus is that the UK economy is far from out of the woods with markets looking at its ability to sustain growth.

Data releases of note today; Markit Services PMI for May expected to rise from 52.9 to 53.0 and Halifax House Prices for May expected to decrease MoM from 1.1% to 0.3%.

USD

Ahead of a raft of employment data due to be released this week, market focus has shifted increasingly towards whether the case for the tapering of the Federal Reserve’s bond-buying programme will be further strengthened. With recent positive data from the housing and construction sectors, it is our view that positive data this week will go a long way to reinforce Chairman Bernanke’s assertion that the Fed will begin to consider its monthly bond purchases. This has also been reflected in a recent back-up in Treasury Yields.

The early-week dollar sell-off paused as investors await the trio of US job reports whilst, the Dollar Index, which traces the greenback against currencies of six of the U.S.’s trading partners, reached 82.6 – an increase of only 0.1%. Figures from the Department of Commerce, indicated that the trade balance widened in April from a three-year low illustrating a increase in US imports.

Data releases of note today centre around the ADP Non-Farm Employment Change figures which act as an early indicator before Friday’s government-released figures, and the ISM Non-Manufacturing PMI data which is expected to increase slightly from 53.1 to 53.4.

EUR

The euro rose marginally against the dollar yesterday after a spate of data revealed that producer prices had declined in the euro bloc. Despite this negative data the currency made slight gains as the release increased speculation that the ECB will announce more rate cuts in the medium term.

The markets are now focused on tomorrow’s ECB monthly meeting for clues on future policy with the majority of analysts expecting interest rates will be held steady. One small positive for the eurozone is that Spanish unemployment has dropped marginally due to a boost in senior labour. Latvia is expecting to be confirmed as the 18th country to join the euro currency bloc at the start of 2014, binding closer to Europe and further from Russia. However, the unrest around this path, when compared to a few years ago highlights the decline in fortune for the Eurozone.

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Written by Tom Tong

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