Sterling reverses falling trend after strong service sector figures, as markets await ECB and BoE decisions today

Tom Tong04/Jul/2013Currency Updates

GBP

For the month of June the services sector in the UK showed its strongest month in over two years. The Markit services Purchasing Managers Index hit 56.9. Any figure over 50 shows business expansion, and whilst an expansion was expected the level was higher. There has now been growth for six consecutive months. This is solid news for the UK recovery. For the first time in recent history businesses are struggling to match their output to demand, and this has lead to the largest staffing increase in six years. This meant that Sterling gained against both EUR and USD and reversed the loses of the last week.

All of this has lead to positive news for the profitability of UK companies. The Office of National Statistics stated that British firms are reaching towards the same profit levels since before the global economic crisis. The net rate of return on investments for non-financial corporations is now 12%.

Today is the first MPC decision under the new leadership of Mark Carney, this is the only top tier data released today. Due to the recent positive data and strong signals of growth, it is expected that no major changes will be made. Whilst it is thought that Carney might wanted to have made a statement of intent with his first MPC meeting, money supply is doing well, and is up by an annual 5.5%, a rate that has not been reached since 2008. This expected consistency with regards Quantitative Easing will provide stability to sterling.

The only other data release of note is the Halifax Housing Prices. This is expected to show the continuing trend of recovery in the housing market.

EUR

Portugal’s borrowing costs rose sharply yesterday amid fears of increasing political unrest in the country. Two ministers have resigned from government this week which has served to both place additional pressure on the country’s fragile coalition government and perhaps most importantly, sparked fears that the European sovereign-debt crisis is suffering continued pressure. With two more Portuguese ministers rumoured to be considering their futures this week, Prime Minister Pedro Coelho is seeing faltering support for his implemented austerity measures. Consequently, the likelihood of early elections is rapidly increasing which would act to destabilise the 17 nation currency further. Yesterday, 10-year bond yields broke through the 8 percent level and Portugal’s main stock index – the PSI 20 – has reflected the political instability and dropped by more than 5 percent, reaching November lows.

On Wednesday the euro was penalised by the headlines emanating from the peripheral nation and traded approximately 0.6 percent from its monthly low; nevertheless some analysts have suggested that whilst the euro is evidently still sensitive to peripheral politics, it has illustrated relative signs of resilience. Ahead of the European Central Bank meeting today, markets are seeking assurances that Mario Draghi will continue with his current accommodative stance and provide an element of forward guidance at a time of such uncertainty. This form of monetary policy would highlight an implicit contrast with the US Federal Reserve’s QE tapering and ultimately emphasise the diverging pathways of the ECB and the Fed.

Analysts are expecting the ECB to keep its benchmark interest rate at a record low of 0.5 percent in today’s meeting. After Draghi disappointed markets by rejecting expectations of imminent policy action during the June meeting, it is clear that in lieu of this week’s events in particular, the ECB President needs to strike a more reassuring tone today.

USD

The Greenback lost ground against the Pound and the Euro yesterday as investors pulled back ahead of the July 4th holiday and the ECB policy decision today.

Additionally, the US stock markets closed early and remain closed today amid the Independence Day celebrations. Trading is anticipated to be thinner than usual with less participants in the market which should lead to more volatility ahead of the all important Non Farm Payroll report on Friday.

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Written by Tom Tong

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