The economic expansion in the United States reached a milestone last month, with unemployment exceeding pre-crisis peaks for the first time; almost five years after the recovery began. While economic data came better than expected, the US Dollar could not push hard enough against its European counterpart.
Across the Atlantic, the European Central Bank caused slight turbulence in the forex markets, by cutting their benchmark interest rate, and becoming the first major central bank to drop deposit rates below zero.
The Euro started the week at 1.3635, range trading between 1.3600 and 1.3650 during the week. The single currency then plummeted to touch a low of 1.3503, after the ECB announced that they would cut the benchmark interest rate by 0.10 percent, and deposit rates to -0.10 percent.
The EUR then regained its losses and more, to touch a high 1.3677; on speculation, the European Central Bank’s round of growth-boosting measures is not enough to weaken the currency as part of efforts to bolster economic growth. The single currency slightly lost its momentum, to close the week at 1.3643.
The Sterling Pound endured a solid performance against the US Dollar. The Pound opened at 1.6755, falling to a low of 1.6699. The Pound then erased its losses, as the better than expected economic data surfaced.
The Japanese Yen went with the trend of the US Dollar. The currency opened the week at 101.77, weakening rapidly as optimism in US economy pushed the greenback higher in the FX market. The Japanese Yen was unable to break resistance levels, touching a low of 102.80. The Yen then reversed its direction, gaining against the greenback, as investors halted the selling of the Euro. The Japanese Yen continued to gain, ending the week at 102.48.
The Swiss Franc followed suit with the euro. The Franc opened the week at 0.8952, range trading between 0.8945 and 0.8995. The CHF weakened dramatically following the ECB’s decision, but was unchanged against the EUR, taking pressure off the Swiss National Bank to introduce additional measures to defend its currency cap. The CHF continued to decline, touching a low of 0.9037, only to regain its losses to hit a high of 0.8908. The CHF ended the week at 0.8936.
Manufacturing & Services: The Institute of Supply Management Manufacturing Index rose in May to the highest level since November 2013. The manufacturing index rose to 55.4 against a forecasted 55.7, and higher than the previous months’ figure of 54.9. Moreover, the service industry in the United States expanded last month at a faster pace than forecasted. The Institute for Supply Management’s Non-Manufacturing index surged to 56.3 from April’s figure of 55.2, the highest level since August 2013. As the number above 50 signals expansion, the index surpassed the expected 55.6.
Trade balance widens: The US trade deficit widened against all forecasts, as Americans bought record amounts of consumer goods and automobiles from abroad. The trade balance widened by the most in two years to USD -47.2bn, from USD -44.2bn the previous month.
ADP Non-Farm Payrolls: US companies employed fewer workers than expected in May. The ADP Non-Farm Payroll rose by 179,000, the smallest gain in 4-months. Number of Americans filing for unemployment benefits came near the lowest level in almost seven years. Jobless claims 4-week average fell to 310,250, the lowest since June 2007.
Europe
The European Central Bank has cut its benchmark interest rate to 0.15 percent from 0.25 percent, and cut the deposit rate below zero, to -0.10 percent, in an effort to boost lending by European banks instead of parking cash at the ECB.
The President of the ECB unveiled Targeted Longer Term Refinancing Operations, or TLTRO. The initial size of TLTROs is about ¤400bn and all TLTROs will mature in September 2018, or in about 4 years. Draghi stated that, “From March 2015 to June 2016 all counter parties will be able to borrow quarterly up to three times the amount of their net lending to the euro area non-financial private sector, excluding loans to households”.
United Kingdom
The manufacturing sector kept on expanding at a rapid pace in May. The Manufacturing Purchasing Managers’ Index’s (PMI) dropped only slightly to 57.0 from 57.3, well above the 50 mark that divides growth from contraction. The PMI fell below economists’ expectation of 57.1. The manufacturing production is expanding at a quarterly rate close to 1.5 percent, although the sector is still around 7.5 percent smaller than its pre-crisis peak.
The United Kingdoms’ Construction Purchasing Managers’ index slowed even further, against market forecasts. The Purchasing Managers Index fell to 60.0, from last months’ 60.8, failing to meet economist expectations of 61.2. A reading above 50 indicates expansion.
It was the fourth month in a row that the pace of growth eased after hitting a six-and-a-half-year high in January. The United Kingdoms’ construction industry was affected badly by the financial crisis, but has been recuperating since last year as a result of record-low interest rates. Nonetheless, the construction industry remains about 10% smaller than before the financial crisis. The construction PMI index has been above the 50-threshold mark for 13 straight months.
Commodities
Gold rose last week, as fears from the Euro area overwhelm investors, extending demand for the precious metal. While unemployment claims near 7-year lows, and PMI’s outperform previous months in the United States, Euro area fears gave investors a scare on the economic situation, and increasing risk aversion.
The Peninsula
