Data points to UK slowdown

UK Economy suffering from renewed Brexit concerns

March’s services activity report was the lowest for 20 months and there was expectation that there would be a significant rebound when the April data was released yesterday. Although activity in April rose from March’s low, the rise was not of the magnitude expected by the markets. This points to a continued slowdown in economic activity and illustrates the difficulties faced by the UK Government as confidence in their ability to deliver a Brexit that is both as desired by the referendum result and positive economically drains away.

Next week’s MPC meeting will remain significant, not now for a rate hike but for the comments from Governor Mark Carney at his press conference in which he will be expected to be more defensive about the country’s economic prospects yet provide advance guidance on rate hikes in the future.

Sterling was beginning to show signs of having made a short-term bottom prior to the data being released. It reached a high of 1.3667 before falling back to close at 1.3614. It has fallen back below 1.3600 overnight and is currently (6.30BST) trading at 1.3576.

Next week is dominated by the MPC meeting but data releases include house prices on Tuesday, manufacturing and industrial production on Thursday.

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Dollar index treads water ahead of data

Analysts are continuing to provide conservative estimates of today’s headline Non-Farm Payrolls data relying on the six-month moving average of +198k to be their best guess. Given the unpredictability of the data which relies on estimates in several categories that is hardly a surprise. It is probable that the March figure of +103k will be revised significantly higher but it is the data for wage increases that will exercise most traders’ thoughts.

A figure close to 3% will be sufficient to raise expectations of a rate hike at the June FOMC meeting despite cautious comments on inflation from Fed Chairman Jerome Powell following this week’s meeting.

The dollar index corrected a little yesterday reaching a low of 92.34 and closing close to that level. Overnight it has been virtually unchanged as traders await the data.

It is too early to call a top for the dollar’s recent rally given the number of positive drivers the greenback has been reacting to but give the proximity of a major support level for the Euro which makes up more than 50% of the index’s basket a disappointing employment report could start a significant correction.

Reactive euro struggling to make ground

The single currency continues to suffer from the refusal of the ECB to provide any material support in the shape of withdrawal of additional accommodation or verbal support from advance guidance on rate hikes. Mario Draghi remains steadfast in his belief that the Eurozone economy, while probably sufficiently robust overall to withstand tighter monetary policy, still suffers from pockets of concern that will take a considerable time to dissipate.

Data released recently shows that 47% of all loans in Cyprus and 35% in Greece are past due. While these economies make up a small part of the overall Eurozone economy, Draghi takes very seriously his commitment to treat each economy in the same manner and while the stronger economies of Northern Europe are not seeing significant increases in inflation he believes rates can remain lower for longer.

It remains to be seen what effect on inflation will be seen from the fall in the Euro but since the source and path of price increases have not been evident the ECB will remain reactive and welcome the economic benefit of a lower currency.

The euro is back below 1.2000 despite making a high of 1.2010 yesterday. It has barely changed overnight also awaiting today’s U.S. data. It is within striking distance of significant support at 1.1880 but it will take a major surprise for that the be conclusively broken in the current environment.