Investors did get to see a forex move, however it may be fleeting as the market now waits for central bank guidance. The mighty dollar has slid in early European trading, pushing the pound to its highest level in three years and the 18-member single currency to its strongest print in two months. This morning's catalyst is the stronger-than-expected UK service data print, coupled with similar pockets of results from eurozone members all supplementing a positive euro retail sale print (+0.3%). The rising EUR only adds to the dilemma for the ECB when it announces its policy rate decision on Thursday. For the BoE, some "hawks" may take flight.
The UK's latest upbeat survey points to a buoyant economy (service sector accounts for +75% of the UK economy) and is likely to put pressure on the BoE policy discussions this coming Thursday. This morning's UK service PMI has surprised to the upside - April's 58.7 headline is better than the March print of 57.6 – confirming the fastest pace so far this year, while jobs growth across the private sector has also surged. When combined with last week's manufacturing and construction PMIs should help to keep alive expectations that growth during Q2 could come in close to +1%. The strength of the PMI's output and employment readings would suggest that the discussion among policy makers about when interest rates will need to start rising will heat up, especially when one throws in the recent house price gains.
The data obviously will support Carney and company's optimism over the UK economy. It could also bring one or two policy "hawks" to the fore at this week's BOE meeting. To date, they have been silenced by the unemployment rate based forward guidance, but with unemployment rate now below +7% the "newly refined and qualitative based forward guidance comes into operation allowing the hawks to express their views." The possibility that the BoE's MPC might actually discuss raising rates is aiding GBP. No one expects the BoE to do anything this week, however the possibility of dissent causes ripples that eventually become waves. Cable has so far managed to scale a fresh 57-month high (£1.6954), allowing the £1.7000 psychological level to remain unlocked for an eventual test. Also aiding the technical analysts' viewpoint are the upper Bollinger bands that are again pointing higher - sterling pullbacks have been limited.
The EUR too is being driven higher by upbeat data, especially from the weaker members. So far, the single currency is straddling its two-month high (€1.3928). All of this only adds new complications to the ECB's policy meet this week. Activity in Spain's service sector grew at the strongest pace since before the global debt crisis (April's PMI 56.5 vs. 54 in March), even the Italian PMI revealed a marked improvement (51.1 from 49.5). For the eurozone, the composite PMI (services and manufacturing) delivered a reading of 54 in line with expectations and also a 35-month high. These are all good numbers, allowing the market to push the single currency to breach the psychological €1.3900 handle.
The good however does provide a problem for Draghi and company. Inflation in the eurozone has fallen well below the ECB's target level, pulled lower in part by the stronger EUR, and the rebound so far has been mild. This alone sets the scene for further easing measures (interest rate cuts or QE), but this morning's PMI's would suggest that a broader economic recovery remains in play. The ECB cannot afford to jump the gun and react. This could potentially cut off any growth traction that is currently in play. The market consensus is that the ECB will not take any action this week. In fact, the fixed income traders have pegged the June meeting as next for when Draghi and company will take action. Overall, some further gains are possible for the EUR, but they are likely to remain limited until investors get some guidance from the ECB later this week.
The dollar is having a tough go of it, despite solid prints from ISM (55.2) yesterday and stronger employment last week (UE 6.3%). The Fed's forward guidance is keeping a lid on rate hike expectations. This is allowing the dollar to be treated with "benign neglect" – the dollar sells off even with better US centric data. The flip side is allowing risky assets and higher yielding currencies to perform better. The market continues to look to the Fed for guidance – tomorrow Ms. Yellen testifies before the Congressional Joint Economic Committee on monetary policy and the U.S. economic outlook. After avoiding a press conference at last week's Federal Open Market Committee meeting, and mostly skipping monetary policy themes in a speech on Thursday, the Fed's head may be forced to clarify her thoughts on the economy. The market will be looking for anything in reference to last week's supposedly strong jobs report.