Headlines
- Sterling slammed by soft manufacturing PMI – Pound down vs. majors.
- Sterling hits 6-yr high vs. Euro – Then sinks -1.3 cents.
- GBP/USD slides to 17-month low – Rate hike bets push Dollar higher by 2.5 cents.
- Election jitters also hurt Pound – CAD, AUD & NZD all up.
Sterling
It seems that Sterling must have partied pretty far into New Year’s Day last week because the Pound’s hangover didn’t start to kick-in until Friday January 2nd. But when it did kick-in, it kicked hard. A disappointing UK manufacturing PMI report sent Sterling spiralling lower against all of its currency peers. And with Bank of England rate hike bets being pushed all the way into 2016, it looks like its going to take more than an aspirin to sort this headache out.
A shock fall in the holy trinity of new orders, output and employment led to a downbeat factory output score of 52.5 for December. The three-month low score underwhelmed analysts’ expectations of 53.6, suggesting that manufacturing growth could continue to moderate in the New Year, thus paving the way to a longer period of ultra-low interest rates.
Euro
After hitting a fresh six-year high against the Euro during the morning, Sterling slid by over a cent on Friday as BoE rate hike concerns worked against the Pound.
The single currency had tumbled to a 2008 low in reaction to comments from European Central Banker Mario Draghi suggesting that quantitative easing is on the cards at the ECB. Draghi said that the risk of the bank not fulfilling its mandate was higher than six months ago and as a result of that policymakers are preparing to adjust the ‘size, speed and compositions’ of its asset purchases in early 2015.
However, demand for the Pound plummeted following the soft manufacturing PMI result and GBP/EUR declined by around -1.3 cents.
Data due for release later today is expected to show that German inflation halved from 0.6% to 0.3% in December as sliding oil prices weighed on consumer prices. A result like this has the potential to hurt the Euro because it could be seen to increase the prospect of immediate stimulus action from the ECB.
The Pound to US Dollar exchange rate fell to a 17-month trough on Friday in reaction to the soft British factory output figures.
US data also disappointed, with ISM’s index of manufacturing output sliding from 58.7 to 55.5 but the Dollar was far less sensitive to the report. This is largely down to the fact that the majority of currency speculators have tipped the Federal Reserve to start raising interest rates in the first half, possibly the first quarter, of 2015. With ‘Cable’ a shocking -2.5 cents weaker today than it was on New Year’s Day, there is potential for a Sterling rebound. At the same time, the diverging rate outlooks of the Fed and the BoE mean that GBP/USD depreciations could become a bit of a theme in 2015.
Yes: the Canadian Dollar is reliant on oil prices to stay strong. Yes: oil prices fell to a fresh five-year low on Friday. But, no: on this occasion it did not lead to a weaker Pound to Canadian Dollar exchange rate. This is because traders were preoccupied with the rate hike dampening UK manufacturing report, which prompted them to send GBP/CAD lower by around half a cent. Besides, with OPEC showing no signs of cutting production, oil prices are likely to sink lower over the next few months. Investors will therefore likely get another opportunity to sell the ‘Loonie’ in reaction to a slide in the value of crude sometime soon.
With PMI results failing to convince traders that the Bank of England is likely to raise interest rates anytime soon, GBP/AUD depreciated by around a cent on Friday. The Pound also felt a little bit of downward pressure from jittery traders betting that May’s general election could spell trouble for the world’s oldest currency if David Cameron wins a second term in parliament. Cameron’s conservative party have promised an in/out EU referendum if they come out ahead in this year’s polls, which is something that would unsettle investors due to the economic uncertainty it would cause.
The New Zealand Dollar gained a little bit under a cent against the Pound on Friday as a lack of BoE rate hike motivation negatively impacted Sterling. However, the highly volatile ‘Kiwi’ Dollar fared less well than it could have because of fears that Chinese demand for New Zealand dairy products could deteriorate in 2015 as the Red Dragon attempts to diversify its supply chain.
Data Released Today
09:30 GBP Markit Purchasing Manager Index Construction (Dec) 59.0
13:00 EUR German Consumer Price Index (YoY) (Dec P) 0.3%