The pound has recovered some ground after falling heavily yesterday. Sterling’s fall came when data showed momentum in Britain’s services industry slowing much more than expected this month, adding to concerns that the UK could slip into recession later this year. The composite Purchasing managers index, a monthly gauge of business activity, fell to 51.8 in May from 58.9 in April and well below economists forecast of 57.3. Any reading below 50 is considered a contraction in economic growth and this month’s data will come as a massive worry to the Bank of England and could throw future monetary policy tightening into question. Money markets are currently fully pricing in a 25-basis point rate rise from the BoE at its June policy meeting and 114 basis points of tightening by the end of the year, down from around 125 basis points on Friday after strong retail sales data. A survey released this morning by XpertHR, a human resources provider, showed employers increasing pay for staff by 4% on average in the three months to April, marking the biggest raise since 1992.
The euro has lost some momentum it gained yesterday against the dollar in early trading. Tuesday’s rally for the single currency was fuelled by several “hawkish” comments by European Central Bank policymakers, which included President Christine Lagarde. Reuters reported that Bank of Latvia governor Martins Kazaks felt the central bank should not rule out a 50-basis point rise, and he sees possible rate hikes in July, September and potentially one more in the fourth quarter. His comments followed those by Austrian central bank chief Robert Holzmann who also told Reuters that a 50-basis point hike in July was appropriate and that ending the year in positive territory is extremely important. Money markets now see the ECB raising rates by 100 basis points by the end of the year, up from just 20 basis points in February.
Pressurised by falling US bond yields, the dollar weakened against its major rivals on Tuesday. However, a slight change in risk sentiment has helped the greenback gain some momentum in early trading, amid escalating geopolitical tensions between the US and China. Chinese State media reported today that it had recently conducted a military exercise around Taiwan as a serious warning to interactions between the US and Taiwan. The news of the exercises comes after US President Joe Biden warned yesterday while speaking in Japan, that China was “flirting with danger” over Taiwan and vowed to intervene militarily to protect the island if it is attacked. The main focus of traders’ attention today will be the releases of the Federal Reserve Bank’s minutes from their May meeting.
13.30 USD US Durable goods
17.15 USD FED’s Brainard Speech
19.00 USD Federal Reserve Bank minutes