Despite a negative European session yesterday US markets managed to close at their highest levels this year last night, as oil prices shrugged off the lack of an agreement at OPEC.

With concerns about economic growth at the forefront of attention this week the services sector takes centre stage today after disappointing manufacturing numbers from earlier in the week, and the latest Caixin Chinese services number doesn’t bode well, coming in at a three month low of 51.2, with business optimism sliding to its lowest level this year. If China’s economy is improving in Q2 the data doesn’t appear to support that view.

Yesterday the ECB followed in the footsteps of the OECD earlier in the week by nudging up its growth forecast for the economy in Europe. Today we’ll get to see whether that optimism is justified with the latest services PMI’s from Spain, Italy, France and Germany. Spain and Italy are expected to show modest improvements to 55.6 and 52.3 respectively, while France and Germany are expected to come in unchanged at 51.8 and 55.2.

In announcing the slight upgrade to the growth forecast for 2016 Mr Draghi suggested that domestic consumption had prompted the adjustment. If this week’s German retail sales for April are anything to go by that might be premature so todays EU retail sales numbers could also offer some clues. Expectations are for a rise of 0.4%, up from a 0.5% decline in March, however the 0.9% decline in German retail sales earlier this week could drag on that number.

In the UK we’ll get further colour on whether the UK economy has hit a partially self-inflicted slump brought about by all the hysteria surrounding the upcoming referendum vote. April data has thus far been disappointing and this week’s early indications for May haven’t been that much better. Manufacturing is stagnating and construction was slightly weaker which brings us to services PMI for May which is expected to see a modest improvement to 52.5 from 52.3.

A poor number here could well raise concerns about a potential negative quarter for the UK economy, in the process increasing speculation about a possible rate cut by the Bank of England.

What was that about a possible DIY recession?   

The main focus today is set to be on today’s US payrolls report for May with the prospect that a decent report could raise expectations about the timing of a Fed rate hike. 

Expectations around today’s number are for 160k new jobs to be added for May, unchanged from the number in April, however given that some of the more recent manufacturing data has been on the weak side there is the possibility that we could come in below that.

The unemployment rate is expected to decline from 5% to 4.9% which would be a welcome boost to the hawks amongst US policymakers however it would really need to happen without a similar fall in the participation rate, to suggest that the labour market is getting tighter.

It is important to note that despite the markets fixation on the jobs numbers which have been consistently positive for the last eighteen months that the primary focus has shifted away from the jobs data and more towards the second pillar of the Fed’s mandate which is prices, and in particular inflation.

This has focus has intensified in light of recent multiple interventions from policymakers like Eric Rosengren the head of the Boston Fed who  traditionally has leaned to the dovish side suggesting that conditions were aligning in preparation for a rise in rates.

These interventions last month saw Fed fund futures jump from a 4% probability to a 36% probability of a June rate rise in a matter of days, and though this has slipped back to 20% a decent wages number, along with a good jobs number might be enough to ratchet this higher.

While manufacturing data has been disappointing, consumer spending has picked up and prices paid data has shown signs of rising inflation.

Average hourly earnings did show signs of moving higher in April rising 2.5% year on year and they are expected to remain unchanged for May, with a monthly rise of 0.2% expected.

After the numbers we also get to see the latest ISM services snapshot for May which is expected to show a modest improvement to 51.4 from 51.2 in April.

EURUSD – holding above the support near the 200 day MA at 1.1100, as well as trend line support at 1.1040 from the December lows for now. While above these key levels the current uptrend should remain intact with a move back through 1.1250 needed to stabilise, and point the way to a return to the 1.1400 area. 

GBPUSD – the pound continues to look soggy and the risk remains for a return towards the May lows at 1.4330. Below that we have trend line support at 1.4260 from the lows this year. A move back through the 1.4500 level is needed to stabilise and argue for a return towards 1.4700.

EURGBP – while above the 0.7720 area the risk of a move towards 0.7820 remains. A fall back below 0.7720 retargets the 0.7640 area.

USDJPY – the US dollar fell as far as the 108.50 area before rebounding. To return to the previous lows we need to stay below the 109.40 area, otherwise risk a return to the 110.50 area.

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