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2 Major Pairs Likely to Rally

2 Major Pairs Likely to Rally

BorisSchlossberg,

2 Major Pairs Likely to Rally

It was a relatively calm overnight session in the currency market with most European markets closed for the May Day holiday. With only the UK open for dealing, the surprisingly strong UK PMI Manufacturing number helped boost risk flows, and despite thin trading, GBPUSD moved towards the 1.5600 barrier while EURUSD inched its way towards 1.3200.

UK PMI Manufacturing printed at 49.8 versus 48.6 expected. This was still below the key 50 boom/bust line, but was a marked improvement from the prior period. Additionally, it was the third consecutive monthly improvement, suggesting that the UK manufacturing sector is beginning to come out of its doldrums.

According to Markit/CIPS press release, "Manufacturers benefited from a modest improvement in new export order inflows, which companies attributed to increased sales to clients in North America, the Middle East, Latin America and Australia. The level of new export work received rose for the first time in over a year and at the fastest pace since July 2011. However, demand from the euro area remained lacklustre."

The news helped to lift cable decisively through the 1.5550 area, and the pair was eyeing a run on the key 1.5600 level in mid-morning London dealing. The recent spate of better-than-expected UK economic data has alleviated concerns that the country is headed towards a triple-dip recession and generated much more positive sentiment towards GBPUSD. The pair has gained nearly 600 pips since the start of last month.

Fears Swirling Around Asian Growth

While cable has been the star of the show in overnight trade, the Australian dollar (AUD) has lagged the rest of the majors today as weaker AIG Manufacturing PMI, which printed at 36.7 versus 44.4 expected, raised fears that growth in Asia is slowing.

Those concerns were exacerbated by weaker Chinese PMI numbers, which came in slightly below consensus (50.6 versus 50.8 expected). Chinese exports are clearly being hurt by the lack of demand from Europe, as well as renewed competition from the US and Japan.

If growth slows further, it will no doubt reverberate through Australia. One key indicator of investor concern has been the steady decline in AUDCAD, a move that reflects expectations that North America will outperform Asia.

2 Major Pairs Likely to Rally Today

With no additional data due out of Europe today, the focus will shift to North American trade, where markets will get a glimpse of the ADP report as well as the latest Fed statement. The ADP number, along with the ISM manufacturing reading, which is due at 10 am ET, could be key to today's FX session.

With US data showing a significant slowdown in activity, if both reports miss badly, the dollar decline could accelerate, causing traders to speculate that the Fed will remain extraordinarily accommodative for the foreseeable future. If US numbers weaken, the EURUSD will likely run to 1.3200 and GBPUSD could hit 1.5600 as the day progresses.

By Boris Schlossberg of BK Asset Management

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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