Foreign Exchange Daily Market Update 02/06/11

Yesterday's disappointing economic data reinforced a weakened outlook for the UK, leading the Pound to trade lower on the currency exchange market. The exchange rate on GBP/USD slipped to a low of 1.6373 as manufacturing grew at its slowest pace in 20 months during May as confirmed by the Purchasing Manager's Index (PMI) slipping to 52.1 from 54.4. Mortgage approvals for April didn't help either when the number of mortgages approved totalled 45,200 missing the forecasted figure of 47,000. The data has dampened expectations that the Bank of England (BoE) will raise interest rates this year as higher interest rates could damage the nation's economic recovery, and while the foreign exchange market continues to foresee rates remaining at their historic low, the Pound may well remain suppressed.

On today's docket the construction sector's PMI, stands alone in terms of data to be released from the UK. Economists expect activity in the construction sector to have picked up in May with the index set to rise from 53.3 to 53.5. The data has the potential to lift the Pound should it come out on target; however a lower than expected reading will simply extend the Pound's loses against the other majors.

The Euro continued to gather strength over the course of yesterday's European session although weak manufacturing data lead to some volatility on the EUR/USD exchange rate which ranged from 1.4384 to 1.4458, while against the Pound, rates fell to a low of 1.1350. Germany's finalised PMI reading for May showed that manufacturing activity was lower than previously thought as the index fell from the preliminary score of 58.2 to 57.7, and the Euro-zone index followed a similar path, revised down from 54.8 to 54.6. Today the Euro-zone will be taking a day off from releasing any economic data; as such traders will once again focus on developments in the Greek debt crisis for guidance on price action.

The US has not fared much better with regards to economic figures, as the ADP Employment change survey showed that the US economy added a bitterly disappointing 38,000 jobs in the month of May. This fell drastically short of the consensus figure of 175,000 jobs which was lower than April's addition of 179,000. Further to this the ISM manufacturing index showed that activity within the manufacturing sector slowed to its lowest level since September 2009, when the index fell from 60.4 to 53.5. Yet despite the downbeat data, the US Dollar advanced against the likes of the Pound, the Euro, the Canadian Dollar and many others, failing only to make gains against the other safety linked currencies: the Swiss Franc and Japanese Yen.

Given the poor performance of yesterday's ADP employment figure, today's weekly jobless claims will take on greater significance given that they can support or discredit the ADP report. Last week's initial jobless claims figure proved disappointing, with the number of first time claimants rising. With weakness in the labour market being evident the same outcome may occur in this week's reading, despite the consensus calling for claims to drop to 417,000 from 424,000. A lower than expected reading would dampen the outlook for Friday's Non-farm Payroll (NFP) figure to provide a positive outcome. Still historically there has been a difference between the NFP and the ADP figures in terms of gauging the health of the US labour market, so yesterday's weak figure may not have much bearing on Friday's report.