Headlines
UK construction PMI impresses –
Confidence hits 11-yr high.
IMF says Greece needs €60bn –
Varoufakis says he will resign if Greece votes YES.
GBP/USD flat on mixed NFP –
Steady rise in jobs, but wages slow.
GBP/CAD hits 5-yr high –
GBP/NZD strikes new 5-yr best.
Sterling
Markit Economics announced yesterday that confidence within the British construction sector rose to an 11-year high during June. Relief following the general election continued to boost output as demand in house building, civil engineering and commercial projects all rose to impressive levels. The headline construction PMI index printed at 58.1, which comprehensively outpaced forecasts of 56.5 but was not enough to significantly increase demand for the Pound. This is because construction accounts for just 8% of the UK economy, whereas this morning’s service sector PMI represents over 70% and is therefore much more likely to drive demand for Sterling.
Analysts anticipate a service sector score of 57.5, up from 56.5 previously, which would likely lead to a surge in the Sterling exchange rate.
Euro
The Pound failed to make any further inroads against the Euro yesterday despite a damming report from the IMF suggesting there is a €60 billion hole in the Greek economy. The Fund posited that Greece needs large-scale debt relief and argued that even then the Hellenic nation may need to be granted a 20-year grace period to bring its colossal debt pile back to sustainable levels.
The downbeat assessment of the crumbling Greek economy appeared to pour cold water on hopes of a deal being made next week because European leaders have maintained a fierce objection to debt relief up until now. If Greek voters opt against accepting the – already expired – bailout package offered by the institutions last week then perhaps we could see a change in approach from European officials. But at this moment in time the big players in the Eurozone are adamant that a NO / OXI vote in Sunday’s referendum is tantamount to a vote for Greece to exit the currency bloc.
On the other side of the coin, Greek finance minister Yanis Varoufakis said that he’d prefer to cut his own arm off ‘than sign an agreement without debt restructuring’ and promised to resign if there is a YES vote on Sunday.
It is possible that the Euro will depreciate massively before British markets reopen next Monday if Greeks vote NO in Sunday’s referendum. However, a YES vote could potentially cause investors to pare back their ‘Grexit’ bets and this could give rise to a rebound in the single currency.
US Dollar
The Pound to US Dollar exchange rate remained flat yesterday as markets considered the mixed messages from June’s non-farm payroll report.
The highly anticipated labour market report showed that jobs increased steadily in June but with little wage growth and to a backdrop of lower participation. The headline NFP index disappointed forecasts of 233,000 with a score of 223,000 but the unemployment rate dipped from 5.5% to 5.3% as participation dropped unexpectedly from 62.9% to 62.6%. Perhaps most importantly, US average wages decelerated from 2.3% to 2.0%, which could persuade officials at the Federal Reserve to delay hiking rates until December, or perhaps until after the New Year.
Most US markets will not be opening today due to the Independence Day celebrations and subsequently the lack of liquidity could lead to sharper, more volatile, swings in GBP/USD.
Canadian Dollar
Sterling struck a fresh six-year high against the Canadian Dollar yesterday morning following the upbeat UK construction numbers. However, GBP/CAD softened by around -100 pips during the afternoon as speculative traders bet that the mixed US labour market report would not give officials at the Federal Reserve enough ammunition to start tightening monetary policy in September. Thos bolstered the appeal of the risk-correlated ‘Loonie’.
Australian Dollar
The Pound rallied initially against the Australian Dollar yesterday as sturdy construction output figures from Britain boosted the appeal of the UK tender. However, the ‘Aussie’ managed to claw back its losses following the US NFP report because the lack of underlying wage pressures was seen by most as a sign that the Federal Reserve will refrain from hiking rates until December.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate jumped to a fresh five-and-a-half-year high yesterday but failed to hold onto its gains as mixed US labour market figures boosted investors’ demand for perceived riskier assets.
If this morning’s UK service sector report impresses then it is highly likely that GB/NZD will rise to new five-year highs. However, a disappointing reading could send investors into profit-taking mode and the Pound could fall.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (JUN) Medium 57.5
10:00 EUR Euro-Zone Retail Sales (YoY) (MAY) Medium 2.3%