The week got off to a slow start with UK and US markets closed for a public holiday. CBI distributive trades survey, a measure of consumer spending, was released midweek below forecast and allowed for some additional profit taking on long sterling positions. The sterling was seen being sold on the weaker data after figures released last week supported the outlook for a strong consumer. The survey would suggest that the central bank is correct in questioning the sustainability of consumer demand with wages still weak. The sterling dropped to six-week lows against the US dollar but remained near 17-month highs against the euro. The sterling later found support on comments from policymaker Martin Weale, who said that interest rates may need to go up sooner rather than later. The comments have allowed sterling to take back some of its earlier losses.

US dollar

The dollar continued its advance against the euro and beat back the sterling this week on strong economic data. The quicker pace of growth seen in the services sector alongside stronger consumer confidence figures bodes well for growth rebounding in the second quarter. First quarter growth shocked investors, but since then, data has shown that markets should expect downward revisions which were made to the figures this week. Investor focus shifted away from the backward looking data and turned to jobless claims and pending home sales. Recently, data on the housing and jobs market has started to pick up again. Improvements in both sectors of the economy would bring the US central bank closer to tighter monetary conditions, which could benefit the dollar.

Euro

The euro’s drive was a function of just how aggressive speculators thought that the European Central Bank would be with its monetary policy decision on June 5. Several pieces of economic data release in recent weeks support more than just a cut to interest rates. Eurozone M3 money supply figures continued to support the view that the ECB needs to act aggressively at next week’s policy meeting. Loan growth remained in negative territory. Additionally, German import prices were down, revealing the downside impact a strong currency can have on prices. Eurozone business sentiment climate was better than expected, but having gotten through so much weak data, the course for the euro had already been set.

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