Headlines
UK service sector PMI hits two-year low –
Hurts BoE rate hike bets.
GBP/EUR gains 100 pips –
ECB’s Draghi hints at additional easing.
‘Cable’ hits three-month low –
Ahead of key NFP report.
Pound hits six-week low vs. ‘Loonie’ –
Canadian unemployment report on tap.
Sterling
It was a bad day for the Pound yesterday with the worst service sector report for over two years sending Sterling reeling in the morning. The highly regarded services PMI report showed that activity within the sector slowed from 57.4 to 55.6 last month. Analysts had been primed for a higher score of 57.6. The Office for National Statistics (ONS), who put the data together, commented that British GDP growth is likely to slow from 0.7% to 0.5% in the third quarter, which dampened Bank of England rate hike bets and explains why traders were quick to sell the Pound following the report.
Euro
Although the Pound initially lost ground to the Euro when the disappointing British service sector PMI numbers hit the newswires Sterling registered a 100-pip appreciation by the close of play in London.
The catalyst for the surge in GBP/EUR was European Central Bank President Mario Draghi’s press conference, which saw the banking chief talk up the prospect of enhanced accommodative monetary policy in the future.
The ECB kept interest rates on hold at -0.05% and maintained its €60 billion a month asset purchasing target but reduced its future inflation and growth projections and hinted that the ‘size, composition and duration’ of the QE programme could be adjusted to help bring inflation back up to the bank’s 2.0% target.
The unequivocally dovish statement was seen by most investors as a sure sign that the ECB will provide the currency bloc with additional stimulus over the coming months and this led to a sharp depreciation of the single currency. It is now possible that the Euro will continue to weaken over the next few months as ECB easing plans come into focus.
US Dollar
The Pound to US Dollar exchange rate sunk to a fresh three-month low yesterday, falling by a further -50 pips as underwhelming UK service sector numbers weighed on Sterling.
The ‘Greenback’ was supported by a decent tertiary output score of 59.0, which beat forecasts of 58.2. The US Dollar also drew support from a better-than-anticipated trade balance result of -$41.9 billion, which, although mighty high, was more upbeat than the median market consensus of -£43.0 billion.
GBP/USD has now fallen for eight consecutive days and there is potential for further dips if this afternoon’s US non-farm payrolls report impresses. Markets anticipate a score of around 217,000, which will not be enough to bolster September Federal Reserve rate hike bets but you never can tell what will come of the notoriously volatile NFP report.
Canadian Dollar
Sterling sunk to a six-week low against the risk-sensitive Canadian Dollar yesterday as soft UK services data weighed on the Pound and the ECB’s dovish commentary boosted risk sentiment, which stoked demand for the ‘Loonie’.
GBP/CAD sunk by almost two cents yesterday but Sterling could rebound this afternoon if the latest Canadian labour market report comes in softly. The unemployment rate is tipped to remain at 6.8% but if Chinese concerns were seen to have an instant impact on hiring patterns then we could see a surprise negative result.
Australian Dollar
A disappointing -0.1% drop in Australian retail sales got the ‘Aussie’ Dollar off to a poor start against the Pound yesterday. However, a combination of soft British data and encouraging remarks from ECB Chief Mario Draghi helped the risk-correlated Australian Dollar rally back during the European session.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate slid lower by around two cents yesterday in reaction to a shift in market sentiment. Despite the turmoil in China risk appetite increased yesterday as traders licked their lips at the prospect of more cheap money courtesy of the European Central Bank. Sterling was also hurt by the morning’s soft PMI report.
Data Released Today
13:30 USD Change in Non-farm Payrolls (AUG) High 217K
13:30 USD Unemployment Rate (AUG) High 5.2%
13:30 USD Average Hourly Earnings (YoY) (AUG) Medium 2.1%
13:30 CAD Unemployment Rate (AUG) High 6.8%
13:30 CAD Net Change in Employment (AUG) High -5.0K