Headlines
UK services slow in May –
Sterling slides.
GBP/EUR close to monthly low –
ECB sees inflation at 0.3% this year.
Pound flat vs. US Dollar –
Service sector output slows in both US & UK.
‘Aussie’ Dollar up on GDP –
Impressive 0.9% Q1 growth print.
Sterling
Demand for the Pound was strangled by a much lower-than-anticipated service sector reading yesterday. Falling from 59.5 in April, May’s services PMI report printed at 56.5 in what was the steepest monthly slowdown since August 2011. Holders of the Pound were primed for a much higher score of 59.2 and the soft result dampened hopes of a robust second quarter GDP reading. Because the UK relies heavily on service sector output – it accounts for over 70% of total GDP – it is now believed that the British economy will grow by just 0.4% in Q2.
The big event on the British economic calendar today is the Bank of England’s interest rate announcement. Well, it would have been if this were five years ago. As things stand, the Pound is unlikely to fluctuate at all around the time of the central bank announcement because traders are almost certain that the BoE will hold interest rates at the current record low of 0.50%.
Euro
The Euro rallied by another cent against the Pound yesterday as traders reacted to some upbeat data out of the Eurozone. April’s labour market report showed that the headline unemployment rate fell from 11.2% to 11.1% and a retail sales report showed that private consumption accelerated from 1.7% to 2.2%. Both of these positive ecostats bolstered the appeal of the Euro, as did an announcement from the OECD suggesting that the currency bloc will grow by 1.4%, rather than a previously estimated 1.1%, this year.
Markets were also buoyed by a fairly upbeat statement from European Central Bank President Mario Draghi suggesting that inflation will run at 0.3% this year, slightly higher than previously forecast. However, the ECB Chief confirmed that the bank’s quantitative easing programme would run until at least September 2016.
Hopes of deal in Athens to avert a potentially destructive Greek exit from the Eurozone also supported the single currency as GBP/EUR sunk to a near-one-month low.
US Dollar
Sterling plummeted -100 pips against the US Dollar yesterday morning in reaction to the dud UK service sector report. However, the Pound managed to claw back its losses during the New York session as investors repositioned themselves following a string of soft US ecostats.
Although marking an improvement on the previous month’s score of -$50.6 billion, traders were far from impressed with April’s colossal trade deficit reading of -$40.9 billion. Neither were they thrilled with a surprise -7.6% contraction in US mortgage applications, nor a sharp slowdown in American service sector output. The ISM gauge of non-manufacturing output softened from 57.8 to 55.7 as sub indexes for employment, new orders and business activity were all reported to have cooled in May.
The next key release out of the States will be Friday afternoon’s highly anticipated US non-farm payroll report, which could have a significant bearing on Federal Reserve rate hike expectations.
Canadian Dollar
The Pound initially lost ground against the Canadian Dollar yesterday as soft service sector data gave rise to a bout of negative sentiment towards Sterling. However, the commodity-sensitive ‘Loonie’ failed to hold on to its gains and cooling crude oil prices helped the Pound rally by around half a cent during the afternoon.
The Canadian Dollar could run into more trouble this afternoon if data shows, as it is expected to, that domestic manufacturing output slowed from 58.2 to 55.0 last month.
Australian Dollar
The Pound to Australian Dollar exchange rate succumbed to a fortnightly low yesterday as markets reacted to a sturdy Australian GDP report and some disappointing British service sector numbers.
On a quarterly basis the Australian economy accelerated from 0.5% to 0.9% in the first three months of the year, outpacing estimates of 0.7%. On an annual basis first quarter growth came in at 2.3%, which outshone forecasts of 2.1%. The upbeat data helped drive the Pound lower from the near-six-year highs of last week.
New Zealand Dollar
Despite disappointing domestic data, the Pound found the legs to register a 50-cent gain against the New Zealand Dollar yesterday. Another drop in dairy prices, this time at a GlobalDairyTrade auction, left holders of the ‘Kiwi’ Dollar with a sour taste in their mouths.
Data Released Today
12:00 GBP Bank of England Rate Decision (JUN 4) High 0.50%
13:30 USD Initial Jobless Claims (MAY 30) Medium 278K
15:00 CAD Ivey Purchasing Managers Index s.a. (MAY) Medium 55.0