The US dollar regained some ground yesterday following Monday’s losses following a weakening of the yen and also data which showed that the US trade gap hasn’t widened as much as the market was anticipating.

Speculation mounted yesterday that Japanese Prime Minister Shinzo Abe may announce a redirection of the nation’s US$2 trillion pension funds away from the safety of its government bonds into riskier assets abroad in order to stimulate growth. As a result we saw a weakening of the yen, which sparked demand for the US dollar.

The US dollar regained some ground yesterday following Monday’s losses following a weakening of the yen and also data which showed that the US trade gap hasn’t widened as much as the market was anticipating.

Speculation mounted yesterday that Japanese Prime Minister Shinzo Abe may announce a redirection of the nation’s US$2 trillion pension funds away from the safety of its government bonds into riskier assets abroad in order to stimulate growth. As a result we saw a weakening of the yen, which sparked demand for the US dollar.

Also data released in the afternoon showed that the US trade deficit widened from US$37.8bn in March to US$40.3bn in April. But as the figure was below an expectation of a widening of the deficit to US$41bn; the US dollar drew support.

The euro zone had some encouraging job market news as data from Spain showed that the number of unemployed people fell by 98,265 in May, which was beyond the average fall for May of around 55,000.

In the UK the construction sector expanded for the first time in six months coming in at 50.8 in May beyond an expectation of an improvement to 49.6, adding the good manufacturing figures that we saw on Monday.

The Australian dollar was the biggest loser of the day, following comments made by the Reserve Bank of Australian that due to the lower inflation outlook there could be scope further rate cuts later this year.

Indeed speculation mounted further of potential rate cuts in the future as GDP figures released last night revealed that the Australian economy grew at its slowest pace in two years. As a result GBPAUD is now trading at a one year high.

Also last night, Japanese Prime Minister Shinzo Abe revealed his growth strategy to boost the Japanese economy; which disappointed markets. As a result the Nikkei slid by 3.8% and demand increased for the yen, which subsequently caused the US dollar to weaken across the board.

Today looks set to be a busy day with regards to the release of economic data.
Service sector figures across Europe, apart from Spain, have disappointed already this morning falling below market expectations. Revised first quarter GDP figures and retail sales figures are also due for release from the euro zone this morning.

Service sector figures are due for release this morning from the UK, with expectations that the sector expanded even further in May.

Given that the US dollar has been under the spotlight recently, today’s ADP employment change figures will be closely scrutinised to get a better gauge of how the all important non-farm payroll figures may come out on Friday. The key point is that, following Ben Bernanke’s recent comments, an improving job market will give scope for the Fed to reduce monetary stimulus which would cause the US dollar to strengthen. A weak job market would have the opposite effect.

Key Announcements:

9.28am – GBP – Markit Services PMI (May): Expected to expand to 53.

10.00am – EUR – GDP (QoQ) (Q1): Expected to remain in contraction but improve to -0.2%.

10.00am – EUR – Retail Sales (YoY) (Apr): Expected to improve to -0.8%.

13.15pm – USD – ADP Employment Change (May): Expected to improve to 165,000.

13.30pm – CAD – Building Permits (Apr): Expected to fall to -4%.

15.00pm – USD – Factory Orders (Apr): Expected to improve to 1.4%.

15.00pm – USD – ISM Non-Manufacturing PMI (May): Expected to improve to 53.5.