- Euro finished the week as the second strongest currency
- UK Manufacturing Purchasing Managers' Index beat forecasts
- US employment data beat expectations
By Joe De Berniere
Euro finished the week as the second strongest currency
It was a roller coaster week in the financial markets, with political turmoil in Italy dominating the headlines. This ended with the Populist Party 5 Star Movement being sworn in to lead the Italian Government, without having to go back to the polls. This was an outcome that was welcomed by the market, as another election could have seen the Populist Party gaining a stronger mandate. The Euro finished the week as the second strongest currency as European political risks receded.
UK Manufacturing PMI beat forecasts
Have we seen a positive turn from the weak UK data in Quarter One? Friday’s UK Manufacturing Purchasing Managers’ Index (PMI) beat forecasts with 54.5 – a reading above 50 indicates growth. Growth was boosted by the sharpest build-up of finished goods inventories in the survey's 26-year history and a steep reduction in backlogs of work. UK Construction PMI this morning also steadied at 52.5 a positive surprise. There are signs of a stabilization from the weak Quarter One data, potentially revealing that a November hike is not out of question and that the worst in Bank of England’s expectations should have past. Services PMI will be the figure to watch on Tuesday, this is a far more important reading to the GBP than Construction and Manufacturing, as the Service Sector contributes around 80% of the UK’s Gross Domestic Product (GDP). From a technical perspective, the GBP is extremely oversold after the Bank of England was forced to walk back on a highly-anticipated interest rate increase in early May, so a strong Service PMI number should see a welcomed correction in the GBP.
US employment data beat expectations
US employment data beat expectations on all fronts, with US unemployment dropping unexpectedly from 3.9% to 3.8% - the lowest in 18 years. Non-Farms also beat expectations with 223k vs the expectation of 189K. Markets pricing on the Federal Reserve rate path is back to normal with the FED funds futures pricing in a 91% chance of a June hike to 1.75-2%. Surprisingly there was no follow through on the USD. This comes amid fears of a global trade war due to the Trump administration deciding to let the temporary exemptions on Canada, Mexico and the European Union on steel and aluminum tariffs expire. The White House is also threatening China with the tariffs too. Europe, Mexico, Canada and China drew strong worded responses and have all vowed to hit back at US goods.