Pound consolidating as data improves

Purchasing Managers Survey shows continued improvement

Yesterday’s release of manufacturing PMI in the UK showed that the economy continues to grow, and activity is improving following a revision lower of the February number, March was stronger at 56.6 well above the 50 level above which denotes an expansion in activity.

There has been a genuine change in activity following the agreement of the Brexit transition and finance directors and CFO’s, who may not be particularly impressed by the content of the agreement, are relieved that at least now they have something “official” to work with.

In keeping with recent times, an air of optimism rises when Brexit is out of the headlines and traders can concentrate on economic developments and the outlook for monetary policy. Yesterday’s data was another building block in the case for a rate hike next month as the MPC continues towards the normalization of interest rates.

The pound finds itself hemmed in between the 1.4020 and 1.4100 levels. Buyers believe the recent rally from the low of 1.3711 on March 1st has further potential while sell orders from traders who were caught by the speed of the decline from 1.4245 last week, have set their sell orders at or a little above the current level of 1.4080.

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Dollar index holding onto gains

There is an optimism surrounding the dollar index which has managed to hold above the 90.00 level over the past few days as the constituent parts have suffered from a lack of liquidity and activity. The approach of the release of the NFP data this Friday also breeds a certain amount of optimism following a far stronger than expected rise in new jobs in February.

There is a degree of realism surrounding the headline number for March with analysts expecting the notoriously difficult predict number to come in at around +200k.

Following a day when there were no new concerns over a trade war, despite the threat remaining in the background, the dollar managed to consolidate its recent improvement. Traders remain wary of the U.S. administrations veiled desire for the dollar to trade a little lower despite the “official” feelings of the President and his Chief Economic Advisor.

As the Fed continues to move towards its own normalization of interest rates, the pace rather that the direction of changes to monetary policy becomes a prime driver for the currency. There is still a degree of expectation from traders, who still see four hikes in 2018, despite the dovish recent comments of the Fed Chairman, driven by growth in employment and wage inflation.

Euro lacking impetus

As reflected by the baby steps being taken by the dollar index, its major constituent, the single currency, is moving slowly in the opposite direction. Without any reason other than the overhang of concern over the banks’ bad debt portfolios, the Euro is lacking positive factors to drive it higher. In the opposite manner to the cautious optimism surrounding the Feds outlook where it is clear they will hike four times if the data permits, the ECB takes a different view. Mario Draghi has been clear that unless there is an overwhelming reason, monetary policy will remain dovish and the Asset Purchase Scheme will remain in place.

This has led to the euro suffering although all that has happened is that it has fallen to the lower end of its well-known range. Yesterday it traded in a 1.2345/1.2253 range although there appears to be little interest in testing support at 1.2240.

This week sees the release of several pieces of data, including inflation; which is expected to remain benign with the core YoY rising marginally to 1.1%, unemployment; which is expected to fall to 8.5% from 8.6%, retail sales; likely to have improved considerably from the previous very poor data and purchasing managers indexes; which should continue to show unspectacular yet positive activity.