Pound rises on stronger than expected PMI service reading

05-06-2009 10:35

During the Asian trading session the Euro fell to 1.3250 caused by the news that the Bank of America will need an additional $34 million. The single currency found support as a result of the March Euro-Zone retail sales release. The eurozone showed a 4.2% record fall in consumption while a 2.6% drop was expected. Consumers continue to reduce spending, following the deteriorating recession, as food purchases declined by 5.2%. Nevertheless, the 0.6% decline in March was expected since labor conditions worsen, particularly in the eurozone’s largest economy; Germany.

Global economy prospects increase - Looming rate decision stimulates Euro

The poor retail sales offsets the recovering sentiment readings for the eurozone which results in a rather difficult situation for the European Central Bank. The central bank first prefers to determine the effects of the previous growth measures, through which they don’t have to cut their benchmark rate to 1.00%, which would be a record low. Nevertheless, growth and inflation risks remain to the downside and while the recession in the UK and in the US seems to weaken, the focus is on the committee which should anticipate adequately. With the rate decision ahead, the Euro rose as it found support on the more positive outlook for the worldwide economy. The EUR/ USD could be influenced by the rate decision and may fall, but the 100-Day and 20-Day SMA’s at 1.3200/ 180 form considerable strength below. If non-standard measures are not initiated by policy makers and if they prefer to only reduce rates by the estimated 25 bps, a test of the 200-Day SMA at 1.3485 could follow.

Largest annual decline Halifax house price reading - Service sector gauge rises

Although the Pound dropped to 1.500 during the Asian trading session, support was boosted by the PMI service reading which exceeded expectations on which the Pound surpassed the 1.5120 level versus the Dollar. The service sector gauge went up from 45.5 to 48.7 in March as a result of increasing new business from 44.1 to 48.2. The sector continues to contract but is closing in on the 50 boom/ bust level and exceeded expectations of 46.6. Nevertheless, there are also less positive figures, such as the Halifax house price reading which dropped by 17.7%; a record fall since 2002. Upside potential for the UK economy will be limited as long as the housing sector remains gloomy and it will increase the risks that previous efforts to boost growth will turn out less efficient. Furthermore, increasing tax burden in the UK limits the growth outlook. Nevertheless, the Pound Sterling could find support over the short-term due to the British economy gaining from the attempts by the central bank. Market participants believe that the Bank of England will be decisive on tomorrow’s rate decision since they are running out of options to enhance growth.

Less than expected private jobs losses

Significant volatility could be boosted today by the upcoming ADP employment report, which is a precise indicator of the more dominating non-farm payroll report. Job losses are estimated at 645,000 which is significantly less than the 742,000 of the previous month. Growing optimism in the US can be increased if the print turns out positive and could affect the Dollar and spark risk appetite. The Greenback faced pressure throughout the European trading session but gained during the Asian session as markets started to trade past tomorrow’s bank stress test data. Nevertheless, traders in the US may continue to sit on the fence which could stimulate the Dollar.