Daily currency report
Overview
The British pound is closing in on one-month highs against the US dollar and on a trade-weighted basis after robust data on Britain’s services industry boosted optimism about the UK’s economic recovery. In contrast, the US dollar came under further pressure amid concerns that US employment data will undo bullish expectations of faster US economic growth persuading the Federal Reserve to reduce its quantitative easing.
The euro also rose against a weaker US dollar but is looking vulnerable in other crosses ahead of European Central Bank announcement. Poor economic data underlined the euro area’s underwhelming performance throughout the second quarter. This may force Mario Draghi to keep the door open to near-term monetary easing. Markets will also keep one eye on German industrial data followed by the Bank of England’s latest interest rate decision.
Sterling
The British pound extended recent gains against the US dollar, hitting May 5 highs after the latest PMI survey on Britain’s services sector outstripped all expectations, suggesting the UK economy now has enough momentum to accelerate after returning to growth earlier this year. Britain’s growth-engine services industry expanded at its quickest pace in over a year last month according to CIPS’s monthly PMI measure, rising from April’s 52.9 to 54.9. Analysts had expected a much smaller gain to 53.0.
US dollar
The US dollar spent another session under pressure after more mixed US economic data increased the risk of highly anticipated US labour market figures persuading the Federal Reserve to stick with its open-ended quantitative easing strategy. The US currency’s trade-weighted value dropped to another fresh three-week low and the greenback hit similar troughs against the British pound after ADP’s May survey of private sector hiring in the US missed forecasts.
Euro
The euro rose against a weaker US dollar ahead of European Central Bank policy announcement despite data from the eurozone pointing to continued recession through the second quarter. Eurozone retail sales fell by a larger than expected 0.5 per cent in April from a downwardly revised 0.2 per cent. In addition, revised PMI data showed services firms in the euro area and Germany contracted at slightly quicker than expected pace in May. Most Central Bank observers do not expect the ECB to make changes to policy.