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A market holiday in London yesterday dampened the pound’s already-tepid volatility. It was a quiet day for the UK yesterday with the UK banks being off-line and celebrating the May Day Bank Holiday. In fact, it’s going to be a quiet week for the pound; today we have the release of GBP PMI Services – which measures the economic situation in the UK services sector and came out better than expected, and there is nothing on the economic calendar tomorrow which leaves all eyes now focusing on Thursday’s BoE monetary policy meeting (The Bank of England is widely expected to leave its benchmark rate on hold at a record low 0.5% and the size of its asset purchase programme unchanged at £375-billion). Friday sees the release of UK Industrial and Manufacturing production figures.

The pound is currently being well supported by a combination of positive UK data and positive market sentiment. House prices are up, manufacturing PMI is up, GDP came in at 3.1% which is 0.4% better than last quarter and finally retail sales and consumer credit both came in higher than expected confirming that consumers are little more relaxed about spending cash – all in all, the forecast for Britain’s economic growth looks good. At this stage the market will continue to focus on the BoE and the MPC – looking for any clues on when they might hike interest rates.

In Europe for the first time since 2008, overnight interbank rates are exceeding the European Central Bank’s benchmark interest rate, signalling a return to pre-crisis behaviour even as the economy remains fragile. That’s testing the ECB president’s promise that officials are ready to respond to any unwarranted monetary tightening.

In the meantime – the newswires are doing what they can to remind us that there is an ECB rate decision on Thursday this week. There is already tremendous speculation suggesting the central bank will make easing move in the near future – though it never seems to be at the next central bank meeting. Consensus is that the ECB will soon take action to stimulate Europe’s dilapidated economy, by cutting rates further and/or through more unconventional policies.

The euro will look to the final revision of April’s eurozone PMI data for a catalyst to spark a breakout against the US dollar. The regional composite index is expected to confirm preliminary estimates showing manufacturing and service sector activity grew at the fastest pace in three years. On top of this we have EU Retail sales figures due out at 10:00 am which is important as the spending figure represents consumption and consumer confidence across the region.

Update:  Strong PMIs, especially from Spain, gave a boost to the euro.

The US dollar is in a strange place at the moment, the data is positive, the economy is growing, new jobs are being created and overall sentiment is upbeat – yet the currency remains weak. Friday saw NFP figures come in much higher than expected at 288 k new jobs against a forecast of 210k. The reaction on the market was fairly subdued. As expected the USD strengthened quickly after the announcement to 1.6835 before retracing all the way back to 1.69 against the pound. Steep declines in the unemployment rate and underemployment rate are only considered positive developments if it is due to quality job gains, not an exodus from the labour force. Until increases in non-farm payrolls translate into upward wage pressures and increased participation in the labour market, the Fed will remain accommodative and interest rates will be range bound. In other words, the long-term USD strength might not be as close as we originally thought. Later in the day, the spotlight will shift to US Trade Balance figures, where the deficit is expected to contract to -$40 billion in March from -$42.3 billion in the prior month. News-flow from the world’s largest economy has increasingly improved relative to expectations since early April, suggesting analysts are under-appreciating the vigour of the US recovery. This opens the door for an upside surprise.

On Wednesday, Federal Reserve chair Janet Yellen will testify on monetary policy and the central bank’s outlook for the US economy before Congress’s joint economic committee. Weekly jobless claims figures will take centre stage on Thursday. Consensus is that initial claims for unemployment benefits likely dropped to 330 000 in the week ended May 3 from the prior week. Claims figures have been extremely volatile of late, probably as a result of seasonal adjustment factors.

Finally, on Friday, the US labour department’s job openings and labour turnover survey report is forecast to show that there were 4.1million job openings on the last day of March, down slightly from 4.173-million at the end of February.

Courtesy of FC Exchange.