Initially, the US dollar traded lower against most of the major currencies despite stronger Non-Farm Payroll readings the previous week amid Fed Chair Yellen’s testimony. Yellen reiterated that “a high degree of monetary accommodation remains warranted.” Nonetheless, she remained optimistic on the economy mentioning, “With the harsh winter behind us, many recent indicators suggest that a rebound in spending and production is already underway.” Meanwhile, she noted that there is “no mechanical formula or timetable” for when an interest rate hike will happen but maintained that rates will stay near zero for a “considering time” after ending QE. The dollar index dropped to as low as 79.06 at the beginning of the week. However, the greenback rallied on Friday to reach a one-week high after the European Central Bank signalled it could deliver fresh monetary stimulus as early as next month.
Last week the euro traded at a 2-1/2 year high against the dollar as service activity grew in all of France, Germany, Italy, Ireland and Spain for the first time since May 2011. However, the currency lost most of its gains as Draghi warned after the bank’s policy meeting that the euro’s strength was “a serious concern” and that the ECB was “comfortable” with taking more action to support growth and raise inflation at its June Meeting.
Similar to the euro, Sterling nearly reached 1.70 a level it did not reach since August 2009 as figures from the Services and Manufacturing sectors exceeded expectations. Meanwhile, cable lost its momentum and dropped to 1.6830 as the Bank of England refrained to increase rates.
The Japanese yen traded in a narrow range against the dollar due to bank holidays at the beginning of the week. The yen edged up as geopolitical risks emerging from Ukraine combined with a slowdown in China’s manufacturing sector drove investors to buy the Japanese Yen pushing the dollar lower.
The Australian dollar surged after the Reserve Bank of Australia held the cash rate at a record low 2.5 percent as widely expected in its latest board review. The Aussie reached a four-week high. The Aussie lost some of its gains on Friday but still managed to close the week up one against the greenback. The currency closed the week at 0.9360.
Growth in the US services sector accelerated in April, rising at the fastest pace in eight months as new orders jumped and overall activity quickened by the most since early 2008. The Institute for Supply Management said its services sector index rose to 55.2 in April from 53.1 in March, topping expectations for a read of 54.1. The data provides further evidence that economic activity is regaining momentum after lagging through much of the winter, a stillness largely blamed on harsh weather.
As widely expected by the market, the European Central Bank left interest rates unchanged in their monthly meeting, waiting for updated forecasts from its staff in June before deciding whether to take fresh action to fight low inflation that ticked up slightly last month. In a conference after the meeting, ECB President Mario Draghi stated that the European Central Bank is ready to take action next month to boost the Euro zone economy if updated inflation forecasts allow it. Additionally, Draghi said that the exchange rate would have to be addressed, adding that the bank’s policymakers held a discussion about “all instruments” at their meeting.
The PMI for the eurozone’s vast service industry rose to a 34-month high of 53.1 in April from 52.2 in March thanks to a surge in new business to its highest since June 2011 and a slight rise in employment. Services activity grew in all of France, Germany, Italy, Ireland and Spain for the first time since May 2011.
Britain’s dominant services sector expanded in April at its fastest pace so far this year and companies hired aggressively, adding to signs that the economy has lost none of its momentum of 2013. The Markit/CIPS services purchasing managers’ index rose to 58.7 in April from 57.6 in March, far above the 50 threshold for growth. Economists taking part in a Reuters poll had expected an unchanged reading. Britain’s economy grew at its fastest annual pace in more than six years in the first quarter of this year.
The Bank of England left interest rates and asset purchases unchanged, despite building pressure for it to act to ease the housing market. The central bank announced it would keep the base rate at a record low of 0.5 percent and maintain the size of its asset purchase program at £375vb as expected by investors. However, concerns are rising that low interest rates are helping propel house price inflation.
The Peninsula
