Sterling Rises In Steady Markets, Dollar Mildly Softer

The forex markets open the week steadily with mild USD weakness, but loss is so far limited. The more notable move is seen in the sterling, with the GBP/USD breaking through 1.55 handle as last week's GDP triggered rally extends. As noted, the sterling broke near term resistance against the dollar and euro - strength would likely carry on for a while. It should also be noted that the pound will face challenges from PMI data this week including PMI manufacturing on Wednesday, PMI construction on Thursday and PMI services on Friday. Slight improvements are generally expected in all of the three PMIs, but PMI manufacturing and construction are both expected to stay below 50. The pound will need some significant improvement from these data to maintain current momentum.

Another key event to be watched is the ECB meeting which would be important for the move in the EUR/GBP pair. There has been an increasing expectation of a rate cut from ECB this week from 0.75% to 0.50%. It's also been argued that the effectiveness of a rate cut is limited, as ECB executive board member Asmussen mentioned that "transmission mechanism is impaired in parts of the currency area". Some argued that it's more plausible for the ECB to cut in June after getting Q1 GDP in May and new projections in June. The central bank could indeed opt for alternate measures such as securitization of loans to small business in this meeting. In either case, the EUR/GBP would likely remain pressurized for a while. However, outlook for the EUR/USD is rather mixed, and would be more dependent on Friday's Non-farm payroll from the U.S.

Today, Euro confidence indicators are expected to show general deterioration for April. Germany is due to release CPI data. The U.S. will release personal income and spending, as well as pending home sales.

The latest CFTC data showed that net positions in most currencies were relatively unchanged on April 23, compared to the previous week. The most notable move was the sharp fall in net longs in the Australian dollar's position. The euro net short rose slightly to -34.2k, up from -29.8k. Sterling net shorts dropped slightly to -60.1k, from -62.0k. Yen net shorts dropped to -79.7k, from -93.4k. Australian dollar net longs dropped sharply to 31.3k, down from 53.2k. It's now much closer to the March low of 7.1k than January's high of 97.0k. Canadian dollar net shorts dropped slightly to -71.7k, from -75.9k.