Headlines
• UK construction PMI hits six-month high –
Thanks to decent job creation and house building figures.
• GBP/EUR at lowest level since May –
Euro boosted by EUR/USD momentum.
• Nasty NFP numbers hurt US Dollar –
2015 Fed hike now unlikely.
• Risk sentiment down on dismal NFP –
BoE hike bets also delayed.
Sterling
It was reported on Friday that British construction output rose at its fastest rate for six months in September thanks to an uptick in house building and a surge in job creation. The headline construction PMI beat expectations of 57.5 by rising to 59.9, which gave the Pound a boost, but not that much of a boost because the construction industry accounts for less than 7% of total UK GDP.
Investors will be looking to this morning’s service sector report to get an accurate gauge of how well the British economy performed in the third quarter. Analysts predict a score of 56.0 which, taken alongside other recent reports, is consistent with quarterly growth of around 0.5% – down from 0.7% in Q2.
Euro
The Pound to Euro exchange rate traded higher on Friday morning as markets reacted positively to the latest UK construction data. However, Sterling sunk to its lowest level since May against the single currency during the afternoon when a dreadful US labour market report led to a spike in demand for the Euro.
EUR/USD is the most-traded currency pair in the world and subsequently when one of the two currencies goes up, the huge amount of liquidity tends to drive that currency higher against the rest of the pack. So, when EUR/USD spiked in reaction to the soft American jobs data the Euro also spiked against the Pound.
The single currency gained around 100 pips against Sterling when the US NFP report hit the newswires but it is worth noting that economic conditions in the Eurozone are not that great – high unemployment, subdued growth, risk of deflation – and therefore we could see GBP/EUR recover over the next few weeks.
US Dollar
Demand for the US Dollar crashed into a brick wall on Friday as a horrendous US non-farm payrolls report knocked Federal Reserve rate hike expectations off course.
In an evocative line that won’t make happy reading for British Prime Minister David Cameron, or anybody else involved in the world of finance for that matter, Brian Jacobsen of Wells Fargo Fund Management suggested there was no positive to take from September’s NFP: ‘You can’t throw lipstick on this pig of a report’.
The headline jobs growth number came in at 142,000, way below the median market consensus of 202,000 and less than the even most pessimistic estimate of 154,000. Adding to the NFP misery was a huge downward revision to August’s score from 173,000 to 135,000. Additionally, it was reported that average earnings stagnated on a monthly basis, compared to projections of a 0.2% gain, and labour market participation shrunk to its lowest level since 1977.
In light of the dismal performance of the US labour market over the last two months it looks as if an October rate hike is off the table. Indeed, markets now reckon there is only a 10% chance of a rate rise this month. The probability of a hike in December has fallen from 45% to 30% and the ‘Greenback’ has suffered as a result.
Because markets don’t expect the Bank of England to raise rates before the Fed, the Pound also suffered from pushed back rate expectations against some of the majors yesterday.
GBP/USD initially appreciated by around a cent in response to the jobs figures and if Sterling can settle above key technical support then it could pave the way for further gains.
Canadian Dollar
The Canadian Dollar sunk by around half a cent against the Pound on Friday afternoon in a kneejerk response to the soft US NFP result. However, GBP/CAD threw away its gains and weakened during the evening as BoE hike bets also suffered.
The figures pointed towards a deteriorating global economy, which initially acted to reduce demand for the commodity-sensitive ‘Loonie’. Although the Canadian Dollar recovered, if risk appetite remains low due to growth concerns then the ‘Loonie’ is liable to struggle as analysts start to mull over the prospect of further easing from the Bank of Canada.
Australian Dollar
Sterling rallied by around 70 pips against the Australian Dollar on Friday as markets went into risk aversion mode following the hugely disappointing US non-farm payroll report.
After nine years of ultra-cheap borrowing costs markets now appear ready for the Fed to issue a token piece of monetary tightening – essentially just to confirm that the global economy is back on track. However, with Chinese concerns at the forefront of their minds Fed policymakers opted against hiking in September and in light of Friday’s dismal jobs data it does not look as if they will tighten in October or December either. This represents a significant negative shift in economic sentiment and could lead policymakers across the world, including at the Reserve Bank of Australia, to slash interest rates further over the next few months.
New Zealand Dollar
The New Zealand Dollar proved the least susceptible to the risk-sapping US NFP report on Friday. GBP/NZD jumped higher by around 70 pips immediately after the labour data hit the wires, however, most of these gains were swiftly erased by the end of the London session and GBP/NZD actually weakened by the end of the New York session.
It appears that hopes of a new trade deal that would open New Zealand’s dairy industry up to lucrative export markets is having a significant positive impact on sentiment towards the commodity-sensitive ‘Kiwi’.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (SEP) Medium 56.0
15:00 USD ISM Non-Manufacutring Composite (SEP) High 58