Monday Sunrise: Australian Dollar on Top, Pound Eyes Construction PMI, U.S. Dollar Lags

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Australian Dollar on Top

The Australian Dollar is seen to be an outperformer at the start of a new week thanks to the publication of a set of better-than-forecast economic data. GBP/AUD is down 0.5% at 1.7558, the AUD/USD is up 0.61% at 0.7615.

Australian retail sales beat expectations by reading at 0.4%, markets had been preparing for a read of 0.2%. Company gross operating profits for the first quarter read at 5.9%, up from 2.8% in the previous quarter and well ahead of consensus forecasts for a reading of 3.0%.

Business inventories read at 0.7% for the first quarter, which is up on the previous quarter's 0.2% and well ahead of consensus forecasts for a reading of 0.1%.

"On balance the Q1 business indicators data were stronger than we anticipated, with profits much higher than our forecasts and inventories also stronger. Growth in the wage bill was a little disappointing. Together, these numbers provide upside bias to our forecast for a 0.9% q/q rise in Q1 GDP, due for release on Wednesday," says Felicity Emmett at ANZ Research.

The GDP print for the first quarter, due mid-week, will form the data highlight for the Aussie Dollar this week.

Pound Sterling Mixed, Eyes Construction PMI

The British Pound ended the previous week on a strong footing as manufacturing PMI data easily beat expectations, suggesting the second quarter will see the UK economy deliver an improved performance.

The next test for Sterling comes at 09:30 with the release of the construction PMI from IHS Markit. Markets are forecasting a reading of 52.0, slightly down from 52.5.

Typically the construction PMI wouldn't be expected to have an impact on Sterling, but markets are once again focussed on UK data releases as they look for a pickup in activity that justifies a Bank of England interest rate rise at the August meeting.

Such an outcome would likely prove supportive for Sterling at a time of growing uncertainty relating to the status of Brexit negotiations.

Dollar Underperformer

The US Dollar is the laggard at the start of the new week, coming in lower against the majority of the G10 despite the positives from the labour market report released ahead of the weekend.

A general 'risk-on' environment in global financial markets at the start of the new week appears to be undermining the typical safe-haven currencies such as the Dollar, yen and Swiss Franc.

"Despite the political turmoil around the globe, markets are mainly positive this morning. Asian stocks are higher and S&P500 futures are also slightly up. The US 10-year Treasury yield has moved above 2.9%. Some of the positive mood this morning may stem from the strong US jobs report Friday, which was strong in all directions: Jobs growth was higher than expected (223,000 versus 188,000 expected), the unemployment rate dropped to 3.8% from 3.9% and average hourly earnings rose 0.3% m/m (0.2% expected)," says Mikael Olai Milhøj, Senior Analyst with Danske Bank.

Looking ahead:

"This week, expect a reversion to US-centric cues and central bank watching. The fundamental picture underlying the broad USD – economic outperformance, yield differential arguments, and shifts in USD positioning – remains largely intact. One thing holding the USD back, though, is the still cautious rhetoric from the Fed regarding its rate hike path," says Terence Wu with OCBC Bank in Singapore.

Euro: ECB Speakers in Focus

The Euro is outperforming the Dollar but more-or-less unchanged against the Pound.

We are told the market will watching rhetoric from central bankers this week. Although Fed rhetoric is absent due to the blackout period, ECB speakers will be heavily featured. Amongst others, watch for Draghi and Weidmann (both Tuesday) and Praet (Wednesday).

The key question is this - are they going to prime markets for an exit from quantitative easing, something that should be announced at the July meeting?

If yes, then expect the Euro to be bid, if no then we could see the single-currency come under pressure once more. Based on the inflation numbers out last week the ground for an exit from quantitative easing are in place, so we would say a steady-as-she-goes message from the ECB members will be likely.