Key Points
Status of today's US data releases will be critical for short-term USD sentiment.
CHF and JPY weaker as global markets shrug off fresh China weakness overnight.
Recent NZD outperformance over AUD should be reversed.
Eurozone, UK PMIs, US payrolls, ISM manufacturing, core PCE prices, Michigan sentiment and pending home sales feature today.

Market Outlook
US data releases will be the key focal point today and strength or weakness in key numbers such as the ISM will be critical for how USD sentiment progresses over the next few weeks. Yesterday's US GDP data appeared to be disappointing, but in many ways it actually supports the notion of a pick-up in activity in Q2. The sharp drawdown in inventories is potentially constructive for a subsequent rebuild, which in turn will mean extra output. This lends some credence to the stronger ISM seen for April. Given the ongoing positional backdrop in EURUSD, the risks remain on the downside (to 1.3340) and this is likely to be pursued if last month's stronger ISM receives affirmation. A weak set of numbers today will prompt some EUR-USD upside, although there will have to be some gross weakness to enable a test of 1.3610, the first main resistance point ahead of the recent high at 1.3680. The prospect of next week's ECB meeting will also offer some support to EUR-USD.

Chinese equities weakened afresh amidst rumours that the authorities were set to introduce a capital gains tax, although thus far the fallout in other markets has been zero. Most other Asian indices are higher on the day. Both the JPY and the CHF have weakened overnight, although here too the market may want to see the status of the US data releases and the impact on global markets before reassessing the situation further. EUR-CHF will carry some near-term upside bias as long as it stays above 1.6475. This is also the case on EUR-JPY while above 163.65, with the main resistance at this week's fresh high of 164.29.

The AUD has remained firm overnight, with yesterday's move above 0.8270 leaving risk up to 0.8325. The NZD has been even more impressive, with technical resistance at 0.7330 breaking yesterday. The market clearly has one eye on next week's RBNZ meeting, although there is unlikely to be anything new in this. The RBNZ only hiked rates as recently as April 26 and will now be waiting to see how the data develops in the months ahead. Also note that while yesterday's Australian data was strong, the NZ business confidence number fell to a 14-mth low. In this regard, the AUD could eventually outperform the NZD. AUD-NZD has strong support in the 1.1100-30 area. Note also that both could give up advances against the USD if today's US data is strong.

Day Ahead
Eurozone - manufacturing PMIs are likely to confirm the solid growth backdrop, although there will be some interest in what is happening at a national level, specifically whether Germany is carrying the rest of the Eurozone and the performance of Spain after recent troubles in the building sector.

UK - the UK manufacturing PMI has been subdued of late, although attention will also be on the output price component, which has been strong.

US - a big day for US data with the ISM manufacturing survey, employment, core PCE prices, Michigan sentiment and pending home sales all due. Last month's rise in both ISM measures provided the foundation for the recent hardening in US rate expectations and whether that stronger picture is confirmed or rejected will be crucial for how sentiment proceeds over coming weeks. Other indicators like the Philly and NY Fed surveys and durable orders have also offered tentative support to the notion that the manufacturing sector is in recovery mode, while yesterday's Chicago PMI was also strong, although this has been unreliable in recent months. The non-manufacturing ISM is due on Monday. Core PCE prices were soft last month (0.0% m/m) but until a weaker trend is established over a number of months, the Fed will not become more comfortable about inflation risks, as confirmed in this week's FOMC minutes. The recent improvements in the weekly jobless claims numbers have led to some cautious optimism abut the labour market, so the market is looking for a slightly better payroll number on this occasion after the weakness seen last month. Michigan sentiment should be reasonably well supported and pending home sales should bounce back a little after the very weak 4.9% m/m drop seen last month.

Diary
Data/event BST Consensus*
 
ES PMI manu (May) 08.15 56.0 last
CH PMI manu (May) 08.30 62.5
IT PMI manu (May) 08.45 54.0
FR PMI manu (May) 08.50 54.0
DE PMI manu (May) 08.55 57.2
EU PMI manu (May) 09.00 55.5
GB PMI manu (May) 09.30 53.7
EU Unemployment rate (Apr) 10.00 7.2%
EU GDP (Q1, 2nd est) q/q 10.00 0.6%
US Personal income (Apr) m/m 13.30 0.3%
US PCE (Apr) m/m 13.30 0.4%
US Core PCE price index (Apr) m/m 13.30 0.2%
US Core PCE price index (Apr) y/y 13.30 2.0%
US Non-farm payrolls (May) 13.30 138k
US Unemployment rate (May) 13.30 4.5%
US Average workweek (May) 13.30 33.8
US Hourly earnings (May) m/m 13.30 0.3%
US ISM manu (May) 15.00 54.0
US Michigan sentiment (May, fin) 15.00 88.0
US Pending home sales (Apr) m/m 15.00 0.3%
Latest data Actual Consensus*
CH CPI (May) y/y 0.5% 0.4%
DE Retail sales (Apr) m/m 2.6% 1.0%
SE PMI manu (May) 58.9 59.0
* Consensus unless stated