Sterling dominance tested by strong US employment data

Claire Hogarth03/Jul/2014Currency Updates

Sterling dominance tested by strong US employment data ahead of today’s payroll report, while Yellen hits back at IBS policy criticism.

GBP

More positive UK data lent support to the pound yesterday, although progress against the dollar was curtailed in the afternoon session. Construction PMI for June jumped to 62.2 from 59.5, belying massive optimism amongst the UK’s builders. A large factor has been the boom in residential property, with the UK government and opposition pledging to build record number of homes over the next decade. Property House prices were also up yesterday, by 11.8% YoY and 1% MoM. Although new regulations on mortgage sizes introduced by the BoE seemed to haves cooled mortgage applications released on Monday, house prices will likely take a little longer to show the effects.

The chief economist at the Bank of England last night echoed the comments of Fed Chair Janet Yellen, agreeing that monetary policy is a blunt tool and only the last line of defence against financial instability. The subject of ‘over egged’ capital markets has been discussed heavily recently, so it may well come up again next week at the meeting of the Bank of England.

Just a Markit service PMI due today, with eyes mainly focused on the US.

EUR

EU data has offered little in the way of excitement this week, and again yesterday we had GDP bang on expectation, at 0.9% YoY for Q1. Not only is this a poor growth level in itself but it shows no progression in the economy; Q4 last year also saw 0.9% growth. Mario Draghi might well address this concern, along with perennial problem child inflation at today’s press conference.

The euro’s 3 month resistance levels have been broken in the last month, and the question on everyone’s mind is whether this could spell the end of defiant euro over valuation.

We of course have the ECB interest rate decision today followed by the one man market mover that is Mario Draghi. There is also Markit services PMI and retail sales to look out for.

USD

The dollar rose from two month lows against its most traded basket, although it couldn’t manage more than evens on sterling, on the back of strong employment figures. ADP numbers showed 281k private sector jobs were added in June, an interesting precursor to today’s payroll number, expected to be around the 213k mark.

Yellen’s lunchtime discussion with the IMF became an indirect riposte to the IBS, who on Monday urged central banks to tighten monetary policy to curtail exuberant capital markets. Yellen essentially declared financial stability as the secondary aim of monetary policy, with employment and growth the primary priorities. This translates at a lack of appetite for raising interest rates any time soon, which weighed on the dollar but buoyed capital markets. She did go on to say that financial stability would be tackled, but with ‘macroprudential tools’ – read regulation.

Today of course is NFP day; any figure outside expectation will lead to pivots. We also have a range of other employment data, participation rate, average earnings, unemployment, as well as Markit services PMI and ISM non-manufacturing PMI.

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Written by Claire Hogarth

Marketing Executive at Ebury. English Literature graduate from the University of York and a motivated professional.