Headlines
- Soft service sector PMI weighs on Pound – Investors push rate hike bets further into future.
- Eurozone private sector growth stalls – Single currency up slightly vs. Sterling.
- GBP/USD stumps to fresh 17-month low – Fed minutes on tap.
- Sterling sinks to monthly lows – AUD & NZD punish Pound.
Sterling
It was another ruinous day on the currency markets for the Pound yesterday, as a 19-month low UK service sector PMI score prompted traders to push back their Bank of England rate hike projections even further into the future. Some speculators are even predicting that the UK central bank will keep rates on hold until the second quarter of next year.
The Office for National Statistic’s (ONS) latest report showed that output in Britain’s dominant tertiary industries decelerated from 58.6 to 55.8 in December, mimicking similar slowdowns in construction and manufacturing. The downbeat reading suggests that the domestic recovery may have started to run out of steam last month, which could bode badly for Sterling as BoE officials become less incentivised to start tightening monetary policy.
Even though European service sector data printed considerably worse than its British equivalent yesterday, demand for the single currency was greater than that for the Pound.
The latest composite of private sector output showed that activity within the currency bloc slowed to its lowest level for over a year in the fourth quarter of 2014. The 18-nation bloc’s three largest and most important economies all fared badly: Germany provided a minimal acceleration of 52.0, France contracted at a rate of 49.7 and Italy shrunk at a rate of 49.4.
The downbeat data stream looks set to continue this morning with Eurozone CPI tipped to fall below zero for the first time since late 2009. A score of -0.1% is predicted but with oil prices half as high as they were just six months ago it is entirely likely that depressed fuel prices could push the Euro area even deeper into deflationary territory.
Sterling slid by around a cent against the US Dollar yesterday to a fresh 17-month low as a soft UK service sector readout weighed further on BoE rate hike bets. Data out of the United States also printed poorly, with both Markit’s and ISM’s tertiary output indicators slowing significantly. The Markit PMI cooled from 56.2 to 53.3, whilst the ISM index fell from 58.5 to 56.2.
However, the ‘Greenback’ remained fairly resilient to the softer-than-expected private sector figures because most other indicators point towards a tightening of monetary policy from the Federal Reserve sooner rather than later. The minutes from the US central bank’s latest meeting, released later this evening, should provide traders with a clearer picture as to when the Fed intends to start raising the benchmark borrowing rate.
The Pound to Canadian Dollar exchange rate tumbled to a near-monthly low yesterday in reaction to the latest disappointing UK PMI result. However, the ‘Loonie’ was not able to hold onto its gains due to another severe slide in the value of crude oil. Oversupply sent the ‘black gold’ down to a new five-year low of $51 a barrel, which had a negative impact on the commodity-correlated Canadian Dollar.
Incidentally, the value of gold shot up to a three-week high yesterday as investors hedged against a possible ‘Grexit’ from the Eurozone.
GBP/AUD succumbed to a monthly low yesterday, as a weaker-than-anticipated service sector score of 55.8, confounding forecasts of 58.5, caused traders to pile out of the world’s oldest currency. The Australian Dollar, on the other hand, benefitted mildly from an AiG services index score of 47.5, up from 43.8 previously. However, demand for the ‘Aussie’ could deteriorate later this evening if the Fed hints that a rate hike is around the corner, as this would likely put pressure on perceived riskier asset classes such as the Australian Dollar.
A welcome rise in dairy prices helped drive the New Zealand Dollar to its highest level since August against the Pound yesterday. Fonterra, New Zealand’s largest producer of the island nation’s most profitable export, announced that dairy prices rose 3.6% at the first auction of the New Year. The upbeat dairy figures combined with the underwhelming British services activity report helped the ‘Kiwi’ appreciate by over two cents to a fresh five-month high.
Data Released Today
08:55 EUR German Unemployment Change (DEC) -6K
08:55 EUR German Unemployment Rate s.a. (DEC) 6.6%
10:00 EUR Euro-Zone Consumer Price Index Estimate (YoY) (DEC) -0.1%
10:00 EUR Euro-Zone Unemployment Rate (NOV) 11.5%
13:15 USD ADP Employment Change (DEC) 225K
15:00 CAD Ivey Purchasing Managers Index s.a. (DEC) 53
19:00 USD Fed Releases Minutes from Its Dec. 16-17 FOMC Meeting