UK Awaits Interest Rate Announcement

By | June 4, 2015

Demand for the Pound was strangled by a much lower-than-anticipated service sector reading yesterday. Falling from 59.5 in April, May’s services PMI report printed at 56.5 in what was the steepest monthly slowdown since August 2011. Holders of the Pound were primed for a much higher score of 59.2 and the soft result dampened hopes of a robust second quarter GDP reading. Because the UK relies heavily on service sector output – it accounts for over 70% of total GDP – it is now believed that the British economy will grow by just 0.4% in Q2.

The big event on the British economic calendar today is the Bank of England’s interest rate announcement. Well, it would have been if this were five years ago. As things stand, the Pound is unlikely to fluctuate at all around the time of the central bank announcement because traders are almost certain that the BoE will hold interest rates at the current record low of 0.50%.

Euro

The Euro rallied by another cent against the Pound yesterday as traders reacted to some upbeat data out of the Eurozone. April’s labour market report showed that the headline unemployment rate fell from 11.2% to 11.1% and a retail sales report showed that private consumption accelerated from 1.7% to 2.2%. Both of these positive ecostats bolstered the appeal of the Euro, as did an announcement from the OECD suggesting that the currency bloc will grow by 1.4%, rather than a previously estimated 1.1%, this year.

Markets were also buoyed by a fairly upbeat statement from European Central Bank President Mario Draghi suggesting that inflation will run at 0.3% this year, slightly higher than previously forecast. However, the ECB Chief confirmed that the bank’s quantitative easing programme would run until at least September 2016.
Hopes of deal in Athens to avert a potentially destructive Greek exit from the Eurozone also supported the single currency as GBP/EUR sunk to a near-one-month low.

US Dollar

Sterling plummeted -100 pips against the US Dollar yesterday morning in reaction to the dud UK service sector report. However, the Pound managed to claw back its losses during the New York session as investors repositioned themselves following a string of soft US ecostats.

Although marking an improvement on the previous month’s score of -$50.6 billion, traders were far from impressed with April’s colossal trade deficit reading of -$40.9 billion. Neither were they thrilled with a surprise -7.6% contraction in US mortgage applications, nor a sharp slowdown in American service sector output. The ISM gauge of non-manufacturing output softened from 57.8 to 55.7 as sub indexes for employment, new orders and business activity were all reported to have cooled in May.

The next key release out of the States will be Friday afternoon’s highly anticipated US non-farm payroll report, which could have a significant bearing on Federal Reserve rate hike expectations.