Headlines
UK services PMI slows slightly
– Demand for Sterling softens.
GBP/EUR edges lower from 7-yr high
– 9-year high EZ retail sales boost Euro.
Pound loses nearly 100 pips to Dollar
– US service sector outpaces UK in Feb.
BOC holds fire on rates
– GBP/CAD slides 230 pips.
Sterling
The Pound was unlucky to depreciate yesterday, for although February’s service sector PMI disappointed forecasts of 57.5 by coming in at 56.7, the underlying tone of the report was fairly optimistic. Job creation surged at the second-fastest rate on record, new business orders increased and expectations for future growth also improved. However, because business activity in the tertiary sector accelerated rapidly during January, February’s score was unable to match the median market forecast.
Sterling slipped slightly against the majors in reaction to the service sector PMI result but, as long as general election fears don’t weigh too heavily over UK economic sentiment, the Pound should remain at elevated levels against the majority of its most-traded currency peers over the next few weeks.
Euro
The Pound to Euro exchange rate came within 1 pip of hitting a fresh seven-year high yesterday but GBP/EUR bounced lower when the UK service sector report was released, and then again when a wildly better-than-expected Eurozone consumer spending report hit newswires.
Data from European shops showed that retail sales volumes surged by 1.1% in January, beating estimates of 0.1%, which helped lift the annual figure to an eight-year high of 3.7%; the biggest monthly increases in sales volumes were witnessed in Portugal (6.8%) and Germany (2.9%).
The Eurozone is now tipped to register steady growth of 0.3% in the first quarter of this year but demand for the single currency could continue to wane if the European Central Bank’s latest easing scheme fails to ignite a period of fast burning growth over the next 6-18 months. Of course, the uncertain future of the currency bloc’s most talked about member state, Greece, could also continue to negatively impact the value of the Euro.
The ECB is due to give a statement on policy later on this afternoon but, because the currency bloc’s central bank recently embarked on its most ambitious stimulus scheme to date, there is little chance of any significant developments and demand for the single currency should remain relatively stable.
US Dollar
Sterling lost out on just under a cent against the US Dollar yesterday as American tertiary output trumped the slightly off-target UK equivalent.
The US ISM non-manufacturing composite, which is the premier measure of American service sector output, rose unexpectedly from 56.7 to 56.9 in February, narrowly outperforming the British figure of 56.7. The day’s dataset sent GBP/USD spiralling lower, but the downward pressure was unable to drive the Pound below a longstanding technical support barrier.
The Bank of England’s monetary policy announcement at noon is almost definitely going to see the UK central bank leave interest rates on hold at the current record low of 0.50%, and as such the market reaction is almost definitely going to be minimal.
Canadian Dollar
The Pound shrank by around 230 pips to a near-monthly low against the Canadian Dollar yesterday as markets breathed a sigh of relief following the Bank of Canada’s latest policy decision.
In keeping to his word – Mr Poloz suggested last week that rates would likely remain stable for a considerable period of time – BoC Governor Stephen Poloz left interest rates unchanged at 0.75% and appeared to rule out the possibility of further rate reductions by mentioning that January’s 25 basis point rate cut was likely to be enough to mitigate the effects of the recent capitulation in crude oil prices.
Australian Dollar
A mixture of negative UK sentiment, deriding from the below consensus service sector report, and upbeat Australian sentiment because of the Reserve Bank of Australia’s decision earlier in the week not to slash interest rates, helped the ‘Aussie’ Dollar roar its way to a 130 pip gain against the Pound yesterday.
The Antipodean currency was also supported by a sanguine fourth quarter GDP score of 2.5%, which helped push GBP/AUD down to its lowest level since February 10th.
New Zealand Dollar
The New Zealand Dollar managed to register an impressive 210 pip appreciation against the Pound yesterday as investors shunned Sterling following the underwhelming UK service sector numbers. In all honesty, the negative reaction to the figures appears to have been overdone and there is good reason to anticipate a recovery in GBP/NZD over the next seven days.
Data Released Today
GBP Bank of England Rate Decision (MAR 5)
EUR European Central Bank Rate Decision (MAR 5)
EUR ECB Deposit Facility Rate (MAR 5)
CAD Ivey Purchasing Managers Index s.a. (FEB)
USD Factory Orders (JAN)