Headlines
- UK Services PMI impresses – Job creation on the up.
GBP/EUR up two cents – ECB strikes hard-line with Greece.
GBP/USD gives up gains – Following risk-off ECB statement.
Sterling rallies 2.5 cents vs. CAD – Crude oil down -10%.
Sterling
A better-than-expected UK service sector report gave rise to a fresh wave of demand for the Pound yesterday. Thanks to an optimistic uptick in job creation to meet demand for new orders, the dominant UK service sector rose from 55.8 to 57.2 in January. In beating forecasts of 56.3, the robust result marked a triumphant start to the year in which all three British PMI results improved at rates faster than economists had anticipated. This bodes well for economic growth in the first quarter, and could help boost the possibility of a rate hike from the Bank of England.
Sterling strengthened by around two cents against the Euro yesterday. First, in reaction to the sturdy UK services PMI print. And secondly, in response to a surprisingly tough statement from the European Central Bank.
Following talks between Greek finance minister Yanis Varoufakis and ECB President Mario Draghi, which Varoufakis described as ‘fruitful’, the ECB released a statement indicating that it was revoking an agreement that had allowed Greek banks to tap emergency liquidity from the ECB. The move was seen as sign that the central bank will not allow Greece to renegotiate its debt pile or fiscal obligations. The ECB’s hard-line stance led to heightened ‘Grexit’ fears and this weakened the single currency as jittery traders hedged against an untimely breakup.
Varoufakis is set to meet German finance minister Wolfgang Schauble later today in what looks set to be an abrasive occasion. If the flamboyant Greek finance minister manages to strike a deal with his German nemesis – no matter how unlikely this is – then the Euro would be expected to surge. However, a discordant outcome could pile more pressure on the single currency.
The Pound to US Dollar exchange rate ticked slightly higher yesterday thanks to the encouraging UK services report but Sterling was forced to give up some of its gains later on in the evening when risk sentiment took a turn for the worse. Most traders interpreted the ECB’s hard-line stance on Greece to be risk-negative and this prompted a bout of support for the ‘Greenback’ due to its reliable status as the world’s premier reserve currency.
In America, data showed that tertiary output mildly exceeded market forecasts in January, but investors were less impressed with a slightly below-target ADP employment change report. Although the ADP figures don’t necessarily have any bearing on the more important US non-farm payroll report, markets often use the ADP score as a barometer for how well they think the NFP report will print. The median forecast for Friday’s key NFP report is around 230,000, which should be enough to support a relatively strong US Dollar.
Following a little bit of a rally over the past few days, crude oil was routed again yesterday. Markets forced crude into a steep -10% daily decline to just $48 per barrel and this had a negative impact on the commodity-sensitive Canadian Dollar. The ‘Loonie’ also suffered in response to a dreadful manufacturing PMI report, which printed at a four-year low of 42.6 in January, down from 55.4 in December.
GBP/CAD rallied by over two-and-a-half cents on the day and came within 100 pips of setting a new five-and-a-half-year high.
Sterling registered a one-cent gain against the Australian Dollar yesterday as global risk sentiment took a turn for the worse and UK fundamentals continued to improve. The Bank of England is due to convene today to discuss interest rates but there is an almost zero chance of a modification to the benchmark rate. However, if British data continues to impress, investors might start paying more attention to the BoE’s monthly meets and this could lead to greater demand for the Pound.
The Pound to New Zealand Dollar exchange rate remained fairly flat yesterday as traders digested the latest RBNZ central bank comments, which appeared to suggest that interest rates would remain static over the next 6-12 months. However, the risk-correlated ‘Kiwi’ is always susceptible to wider economic trends and there is potential for GBP/NZD to hit fresh highs over the next few months if flare-ups – such as Greece – worsen.
Data Released Today
GBP Bank of England Rate Decision (FEB 5)
USD Initial Jobless Claims (JAN 31)
USD Trade Balance (DEC)