he latest manufacturing PMI out of the UK was considerably higher than expected, suggesting that Britain’s economy may be set to pick up pace in the coming months having slowed to a crawl in the first quarter of the year. The index from Markit increased to 57.3 from 54.2 in April, smashing expectations of the 54.0 eyed. This marked the best reading in the measure in three years, although the rally in the Pound was fairly limited given the manufacturing sectors small contribution to overall GDP. We instead await Thursday’s much more significant services PMI, which should give a much better indication as to the overall strength of Britain’s economy.

In the US, the Dollar received some much needed support from comments by Treasury Secretary Steven Mnuchin on Monday. Mnuchin drove 10 and 30 year bond yields higher by claiming that issuing debt exceeding 30 year yields “can absolutely make sense”.

The main event risk for the US Dollar this week is undoubtedly this Wednesday’s Federal Reserve meeting. The Fed is expected to keep rates on hold, with investors instead awaiting comments in the monetary policy statement on the health of the US economy and the possibility that interest rates will be raised again at the June meeting. We think the FOMC will acknowledge the slowdown in the first quarter, while leaving the door open to another rate hike next month.

Major currencies in detail

GBP

The Pound recovered ground yesterday, having slipped on Monday after the European Union took a tough stance on Brexit following talks over the weekend.

The EU endorsed firmed divorce terms while warning Britain to have “no illusions” about swiftly securing a deal to keep access to EU markets. This has capped some of the recent gains that have stemmed from growing political optimism ahead of June’s general election. Polls in recent weeks have continued to show a commanding advantage for Theresa May’s Conservatives.

The monthly construction PMI will be released in the UK this morning. Investors will look ahead to Thursday’s services release.

EUR

The Euro has been fairly range bound in the past couple of days, with traders awaiting today’s Fed meeting and this weekend’s French election before committing to positions.

News out of the Euro-area on Tuesday was slightly disappointing. The manufacturing PMI for April slowed slightly to 56.7 from 56.8, although remained around a multi-year high. Similarly, the unemployment rate rose, although remained around a decade low 9.5%.

GDP data out of the Eurozone this morning could shift the Euro today. Growth in the first quarter is expected to have accelerated to 0.5%, which would mark its strongest rate of growth in a year. Sunday’s French election could prove a non-event, given Macron is heavily priced in as winner. The latest poll from Elabe put Le Pen 18 points behind, which looks far too much ground to make up in such a short time frame.

USD

The Dollar edged higher against its major peers on Tuesday, buoyed by rising bond yields following comments from Treasury Secretary Mnuchin.

With economic news limited on Tuesday, investors turned this attention to today’s Fed meeting. The FOMC will be announcing its interest rate decision at 19:00 UK time, in tandem with their monetary policy statement. We think the main challenge for the Fed will be in acknowledging the first quarter slowdown, while keeping markets prepared for higher interest rates in June. Markets continue to price north of a 50% chance of a hike next month.