Headlines
- Sterling slide continues – Construction PMI disappoints.
- UK service sector on tap – Bad result could hurt Pound.
- German inflation at 5-yr low – Eurozone CPI set to slide into deflationary territory.
- GBP/USD close to 17-month lows – CAD, NZD & AUD all up.
Sterling
The Pound fell further against the majors yesterday as weaker-than-anticipated UK construction data prompted traders to scale back their Bank of England rate hike bets. Just six months ago investors foresaw an increase in interest rates in the fourth quarter of 2014. Now speculators don’t expect the BoE to start tightening monetary policy until the first quarter of 2016. This rapid deterioration in rate hike bets has precipitated a large swing in Sterling’s fortunes. Although the Pound is still riding high against the Euro, it is floundering against the US Dollar and has started to crumble against the commodity currencies – despite the fact that global oil prices are marooned at five-year lows.
Yesterday’s PMI result, which fell to 57.6 in December from 59.4 in November, compounded the negative sentiment towards Sterling that stemmed from last week’s soft British manufacturing result.
Euro
Strangely, the Pound declined against the Euro yesterday even though the threat of a ‘Grexit’ appeared to rise in response to comments made by German Chancellor Angela Merkel. Germany’s own ‘Iron Lady’ is reported to have intimated that a Greek exit from the Eurozone would be manageable because the danger of contagion in other member states such as Portugal and Ireland is far less than it was back in 2010-2011. If true, the remarks suggest that Germany is ready to cut the currency bloc’s most profligate state loose.
Economic analysts, however, are slightly more concerned with the situation; pointing out that past chapters in the crisis were largely driven by problems originating in Greece. If market jitters begin to spread to other countries in the periphery then it is entirely possible that nations with high debt to GDP ratios such as Italy or Portugal could be dragged back into the throes of the crisis.
GBP/EUR slid lower by around -10 pips yesterday even though German inflation sunk to a five-year low of 0.1%, which makes it very likely that Wednesday’s Eurozone CPI print will come in at -0.1% or lower.
US Dollar
It was a day of 17s for the Pound yesterday. British construction output printed at a 17-month low of 57.6 for December. UK housebuilding was reported to have grown at its fastest rate for 17 years in 2014. And the Pound to US Dollar exchange rate tumbled to a fresh 17-month low.
Sterling could conceivably mount a recovery rally against the ‘Greenback’ today if this morning’s service sector print impresses. But – and this is probably the more likely of the two – if the PMI report disappoints then GBP/USD is liable to depreciate further.
The extent to which the Pound has failed to capitalise on the endemic of tanking oil prices is reflected most poignantly in the Pound to Canadian Dollar exchange rate. For although crude touched a fresh five-year low of $51 a barrel yesterday, the crude-correlated Canadian Dollar managed to register a 0.8 cent daily gain against the Pound.
The first influential Canadian ecostat of the New Year is not expected until Wednesday, when domestic manufacturing output looks set to come in at 52.0 for December, down from 56.9 in November.
Sterling is currently floundering close to a monthly low against the Australian Dollar due to yesterday’s disappointing UK construction PMI report and Friday’s downbeat British manufacturing score. The ‘Aussie’ is trading at a five-year low against the US Dollar but, without rate hike currents behind it, Sterling appears to be sailing in the wrong direction against the Antipodean currency.
The Pound slid by around -1.5 cents against the New Zealand Dollar yesterday to succumb to a fresh monthly low on concerns that softer domestic growth and impending general elections could persuade the Bank of England to delay its first rate hike until 2016.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (DEC) 58.5
15:00 USD Factory Orders (NOV) -0.4%
15:00 USD ISM Non-Manufacutring Composite (DEC) 58