Key Points
Markets waiting for more US data - nonmanufacturing ISM today, payrolls tomorrow.
Upside risk for USD unless weak numbers are seen.
GBP could respond to PMI services data - King notes importance and complexities of money data.

Market Outlook
A fairly quiet overnight session, with Japan and China on holiday for the remainder of the week and the market waiting for more information about the US economy - today's nonmanufacturing ISM and tomorrow's employment report. The market remains slightly sceptical about the strength of this week's ISM manufacturing report, but this data is still likely to help the USD in the short-term if there is no offset from data releases today or tomorrow. See below for a preview of today's data. Intra-day resistance on EUR-USD is set at 1.3625-40, while supports are at 1.3560 and 1.3540 ahead of the main short-term support area at 1.3460-1.3500. Downside is favoured in the short-term, unless there are big US data disappointments today or tomorrow.

GBP underperformed yesterday and this may have been due in part to the weaker than expected mortgage approvals data. The release suggests that higher rates are starting to have some impact on the housing market and while approvals have yet to enter territory that suggests genuine weakness, it may raise some doubts over how far policy needs to be tightened further. Despite the strength in housing in London and the South-East, much of it related to 'global' factors like financial market bonuses and inflows of foreign capital, we still have doubts about how the rest of the country will stand up to further extended policy tightening. Two 25bp rate hikes are already fully discounted for September.

Comments by King yesterday alluded to the notion that money data could be a more useful lead indicator for policy but noted that monetary issues were driven by complex factors on both the demand and the supply side of the market and that more research was needed in the area.

Corrective risk remains in place on cable in the absence of any US data weakness over the next couple of days, while EURGBP needs to break out of a 0.6800-50 range to suggest some near-term directional bias. PMI services data is due today (see below for preview) and is a potential market-mover for GBP given the influence it could have on UK policy expectations for the second half of this year.

Day Ahead
UK - PMI services is a measure that is closely watched by the MPC and the strength in this number during Q4, when it remained above 59.00, was a factor behind the rate hikes conducted in Nov and Jan. The index has since come down a little, with Feb and Mar readings at 57.4 and 57.6 respectively compared to 59.2 in Jan. Also watch out for the readings on the 'prices charged' category, which last month rose to 55.3, the 3rd highest level since records began back in 1996 (behind the 55.4 seen in Aug last year and 55.8 in Oct 2000). Today's data is unlikely to threaten next week's rate hike, unless it is very weak, but any strength or weakness in the number could have an impact on expectations about interest rates during the rest of this year.

US - non-manufacturing ISM is today's main feature and this series has been showing weakness in recent times, with last month's reading of 52.4 the weakest since April 2003 (Iraq war). A soft number will be required to offset Tuesday's stronger than expected ISM manufacturing number, while any strength will supplement improving perceptions about the US economy. The employment component will also be watched closely after recent weakness. Q1 productivity and unit labour costs data is also out today and the latter will be watched for inflationary signals.

Australia - the RBA unveil their quarterly Monetary Policy Statement tonight and while this should reveal some downward revisions to inflation forecasts, a tightening bias is likely to remain in place. It is too early to call an end to the RBA rate hike cycle

Diary
Data/event BST Consensus*
Market Holiday (Thu & Fri) - Japan & China
 
GB PMI services (Apr) 09.30 57.5
EU PPI (Mar) y/y 10.00 2.8%
US Productivity (Q1, 1st est) saar 13.30 0.7%
US Unit lab costs (Q1, 1st est) saar 13.30 3.8%
US Initial claims (w/e Apr 21) 13.30 325k
US Continuing claims (w/e Apr 28) 13.30 2594k last
US ISM non-manu (Apr) 15.00 53.0
AU Trade balance (Mar) 02.30 -A$1.0bn
AU RBA Mon Policy Statement 02.30
Latest data Actual Consensus*
CH CPI (Apr) y/y 0.5% 0.2%
* Consensus unless stated