Overall confidence in a global economic recovery continued to drive markets on Wednesday.

The dollar continued to lose ground as defensive demand remained lower. EUR/USD advanced to 11-week highs around 1.1250 before a correction ahead of the ECB policy decision.

The Australian dollar was subjected to a correction, but selling pressure was limited. The Canadian dollar made net gains as the Bank of Canada reported that a worst-case scenario had been avoided.

Sterling was protected by firm global risk appetite, but underlying sentiment remained fragile amid trade fears with GBP/USD selling above 1.2600.

The final Euro-zone PMI services-sector reading was revised up to 30.5 from the flash reading of 28.7 and compared with the April reading of 12.0. New business also contracted at a slower pace while employment continued to decline. German unemployment increased 238,000 for May after a 372,000 increase the previous month, but was above consensus forecasts of 200,000 with the unemployment rate at 6.3%. Data maintained expectations of a gradual economic recovery.

The US ADP data recorded a decline in private-sector employment of 2.76 million for May following a revised slump of 19.6 million for April and much lower than consensus forecasts of around 9.0 million. There was a further decline of 719,000 manufacturing jobs during the month and a decline of over 825,000 in the transport and trade sector. There was, however, increased employment in education for the month. Overall reaction to the data was muted despite the substantial beat on expectations as the firm risk tone helped limit demand for the US currency.

The ISM non-manufacturing index recovered to 45.4 for May from 41.8 the previous month and above consensus forecasts of 44.2. The business activity improved to 41.0 from 26.0 as the rate of decline in new orders also slowed considerably. There were, however, further job losses at a pace close to that seen in April while costs continued to increase. The data will maintain expectations of recovery, but there will be concerns that competitive and cost pressures will undermine employment.

The dollar overall remained weak following the data releases as underlying defensive demand remained weak amid expectations of economic recovery. EUR/USD peaked at 11-week highs just above 1.1250 before a retreat to the 1.1215 area on Thursday with the currency vulnerable to a correction ahead of the ECB meeting.

Market expectations are for an expansion of the PEPP bond-buying programme by around EUR500bn with President Lagarde’s comments also important for sentiment.

Overall risk appetite held steady ahead of the New York open. Equity futures moved higher after the US data which curbed potential defensive yen demand and USD/JPY edged higher to the 108.70 area while EUR/JPY strengthened to the 122.00 area.

Markets remained nervous over the US civil protests in the US, but Wall Street indices remained firm and the Japanese yen continued to lose underlying support. Within the US, President Trump edged away from the potential use of military force against protesters, although underlying tensions remained high.

There were also further concerns over relations with China as sources from Beijing continued to criticise the US Administration.

Overall yen demand remained weak on global recovery hopes with USD/JPY pushing to 6-week highs above 109.00 as EUR/JPY traded above 122.0.

The final reading for the UK PMI services-sector index was revised to 29.0 from the flash reading of 27.8 and 13.4 for April.  There was a further sharp decline in new business as corporate spending was scaled back. Employment continued to decline sharply with an increased number of redundancies. The comparisons are far from precise, but the data suggests that the UK recovery was more limited than in the Euro-zone as domestic re-opening measures were more limited.

Sterling dipped lower after the European open following reports that Bank of England Governor Bailey had warned major UK banks over the seed to step-up preparations in case the UK fails to reach a trade agreement with the EU by the end of 2020. The comments increased market unease over the trade outlook, but Sterling losses were limited and the currency was resilient during the day, especially with an underlying reduction in demand for defensive assets.

Economic Calendar

07:30CHF CPI (M/M)(MAY)0.10%-0.40%
07:30CHF CPI (Y/Y)(MAY)-1.40%-1.10%
09:30GBP PMI Construction(MAY)228.2
10:00Euro - Zone Retail Sales (Y/Y)(MAY)--9.20%
10:00Euro - Zone Retail Sales (M/M)(MAY)-15.00%-11.20%
12:45Deposit Facility Rate-0.5-0.5
12:45ECB Rate Decision(MAY)0.00%0.00%
13:30USD Initial Jobless Claims-2123K
13:30Nonfarm Productivity (Q/Q)-2.50%-2.50%
13:30USD Trade Balance(APR)-40.50B-44.40B
13:30CAD Trade Balance(APR)-2.00B-1.41B
13:30ECB Press Conference--
13:30USD Continuing Jobless Claims20050K21052K
23:30AUD AiG Performance of Service Index(MAY)-27.1

*All rates shown are indicative of interbank rates and should only be used for indication purposes only. It is important to note that foreign exchange rates fluctuate and that rates may vary depending on the amount and the base currency that is purchased or sold. Rates are correct as of 8:00am UK time. CentralFX are not responsible for the rates shown.