Currency traders remained in a rather cautious mood on Wednesday, failing to commit to sizable positions in either direction.

The dollar has been on a broadly downward trend since the beginning of April, but investors appear reluctant to sell the currency too aggressively given the recent strong economic news out of the US and its implications for Federal Reserve monetary policy. So far, Fed speakers have continued to strike a very dovish tone during their latest communications, stressing that they would look through temporary spikes in inflation and that the US labour market still has a long way to go to recover to pre-covid levels.

This Friday’s nonfarm payrolls report will be a key test as to the strength of the latter. The April report was a very underwhelming one, with just 266k jobs added versus the near one million consensus. Another disappointing reading tomorrow would fuel concerns that the recovery is perhaps losing steam, whereas a better-than-expected number above the 660k consensus would heighten bets in favour of a hawkish tilt from the Fed at its June meeting later in the month. Regardless, we expect volatility in the FX market to pick up substantially in the next couple of days. Ahead of tomorrow’s NFP report, we’ll have the US ADP employment change number this afternoon, which measures job creation in the private sector, and the ISM services PMI, both of which could shift the dollar.

Euro Area PMIs revised higher as lockdown gradually eased

Meanwhile, this morning’s revised PMI data out of Europe provided further evidence that a strong rebound in economic activity was on the cards in the common bloc as virus restrictions are gradually unwound. The Euro Area’s composite index was revised up to 57.1 in May, comfortably in expansionary territory and its highest level since February 2018. Virus restrictions have been unwound much slower in Europe than the US and UK, but we are at least seeing an easing in lockdown measures in most nations as contagion levels continue to decline sharply from their peaks. Tomorrow morning’s Eurozone retail sales data for April will be an important one for markets. Investors are currently pricing in a decline of 1.2% month-on-month. This is a sharp contrast to the boom in consumer spending activity witnessed in the UK, so we wouldn’t be surprised to see a bit of weakness in the EUR/GBP cross should this drop in sales be confirmed on Friday.

The pound itself has continued to hover around the 1.41-1.42 mark versus the greenback in the past few days. Similarly to the Eurozone, this morning’s UK services PMI was revised up to 62.9 in May from the previous 61.8 estimate. Macroeconomic data out of Britain has been resoundingly positive of late, making us increasingly confident that we’ll see a strong rebound in activity in the second and third quarters of the year. So far, the Bank of England has been reluctant to sound too optimistic over the recovery, but a continuation of the latest uptrend in economic news could easily change that. Tomorrow’s construction PMI is unlikely to rock the boat, but investors will be paying close attention to a speech from BoE governor Bailey this afternoon.