UK in Focus as Sterling Drifts at 15 Month Lows

UK Construction PMI in focus after disappointing manufacturing on Friday, Eurozone PPIs seen slipping back but rate hike this week remains likely, S&P makes another Greek warning, China slowdown fears increase after non manufacturing PMIs slip, Australian retail sales.

Sterling looks set to remain in focus today, as it trades near 15 month lows on its trade weighted index, with the release of the latest construction PMI data for June. Given that Fridays manufacturing data was a little disappointing, markets remain concerned that further weakness will raise fears about the sustainability of UK growth and prompt concern about further QE, a subject which seems to be being given greater discussion on the MPC.

While the probability of further QE in the short term remains unlikely the mere fact it is being speculated upon highlights the fragile state of the UK economy.

Expectations are for small fall back to 53.5, from Mays 54.

In sharp contrast the talk in Europe remains of the next rise in rates despite evidence that price pressures may be starting to slip back. This mornings PPI figures for May are expected to show a decline of 0.1% month on month, while the year on year figure is expected to slip back from 6.7% in April to 6.3%. Despite this the ECB is expected to raise rates by another 0.25% this week, despite the risks such a move would have on struggling peripheral economies borrowings costs. You would think that the recent events in Greece would give them pause, however Trichet repeated his strong vigilance message last week, which historically presages a rise in borrowing costs.

In signs that the Greek saga will continue to rumble on ratings agency Standard and Poors reminded the markets this morning that for all the talk of loan rollovers and debt relief such an event would in all likelihood be treated as a credit event or selective default.

Concerns about a slowdown in China remain in focus after non-manufacturing PMI data slipped back from 61.9 in May to 57 in June. While on its own these figures dont appear to be that bad, following as they do on the back of the disappointing manufacturing PMIs on Friday, there is a concern that the recent policy tightening may well be starting to do its job too well.

It would appear that consumer reluctance to spend isnt being confined to western economies after Australian retail sales slipped back sharply in May, falling 0.6%, after the 1.1% rise in April, with clothing being amongst the hardest hit. Expectations had been for a 0.3% rise. Building approvals also plunged, falling 7.9% as rising prices start to weigh on demand.