The Chartered Institute of Purchasing and Supply has released figures today indicating that the UK services sector has accelerated to the fastest pace in more than a year for the month of March. The figures came in at 57.1 a 13 month high from the expected 52.6. This is good news for the UK economy due to the service sector accounting for such a large proprtion of the UK economy. As a result the pound rallied against the majority of majors by 1%.
The Chartered Institute of Purchasing and Supply (CIPS)/Markit (PMI) has indicated this morning that UK construction activity has eased slightly in March. The PMI edged lower to 56.4 in March, from February’s high of 56.5. The figure represents a slightly better than expected number amidst forecasts for 54.8. Any figure above 50 indicates expansion and the UK construction sector have reported a strong end to their first quarter with activity rising at a similar pace to the eight-month high recorded in February.
The main focus for the week falls upon the ECB, the Euro has rallied over 5% in the past 6 weeks against the majority of majors on speculation of imminent rate hikes. The central bank meets on Thursday and is widely expected to raise interest rates by 25bp. There is a possibility that they could raise rates by 50bp however this seems unlikely. The ECB are responding to elevated CPI figures in an attempt to maintain price stability. Markets believe that the expected rate hike could be the first of several this year, with most economist predicting a 75bp rise in European interest rates by the end of the year.
The Bank of England is also meeting on Thursday, no change is expected in interest rates due to the current aneamic UK economic recovery. The market has scaled back expectations of a rate hike from the BoE to Q3 at the earliest. The NIESR estimate for Q1 GDP due on Wednesday afternoon will therefore be watched closely in light of recent poor economic news from the UK.
The pound remains vulnerable this week and if the ECB raises interest rates and signal that this could be the first of a series of rate hikes, we would expect the single currency to continue strengthening. If Trichet plays down the prospects for future hikes we would expect the market to react with disappointment and weaken rapidly.
