Headlines
• UK Q3 GDP dips to 0.5% –
Manufacturing & construction shrink.
• GBP/EUR down -30 pips –
ECB easing bets support future Sterling strength.
• GBP/USD depreciates –
But US durable goods & consumer confidence decline.
• Pound rallies vs. Canadian Dollar –
Crude oil down on supply gut bets.
Sterling
The Pound lost ground against some of the majors yesterday as markets reacted to the latest UK GDP report, which showed that the British economy lost some momentum in the third quarter, especially in the manufacturing and construction sectors.
The dominant service sector increased by 0.7% but overall growth slumped from 0.7% to 0.5% thanks to a -2.2% decrease in construction and a -0.3% contraction in manufacturing. The subdued growth print, which was slightly lower than the median consensus of 0.6%, brought yearly GDP down from 2.4% to 2.3%. The result did little to boost Bank of England rate hike expectations and therefore weighed on demand for Sterling.
Euro
The Pound depreciated by around a third of a cent against the Euro yesterday as traders sold the UK currency following the worse-than-expected UK third quarter growth print. The lowlight in the report was the -0.3% contraction in manufacturing output, which, taken with the -0.5% decline in the second quarter, signals that the factory sector is currently experiencing its seventh recession since 1997. A disastrous -41.8% drop in coal mining output and a -7.1% plunge in iron and steel production weighed heavily over the sector, as did the impact of the strong Pound and the sentiment-sapping crisis in China.
But despite the problems in manufacturing and construction, the 0.5% growth score represented the 11th consecutive quarter of positive growth, which helped alleviate downward pressure on the Pound. After all, it was only last week that European Central Bank President Mario Draghi talked up the possibility of further stimulus and subsequently the outlook for GBP/EUR does appear to favour Sterling strength.
US Dollar
The Pound to US Dollar exchange rate softened yesterday morning when the Q3 UK GDP figures were released but Sterling clawed back some of its losses during the afternoon in reaction to some downbeat US ecostats.
GBP/USD ended the London session down by around -50 pips but the situation could have been a lot worse had American data not printed disappointingly too. The US durable goods orders index shrunk by -1.2% on an annualised basis in September and August’s figure was downgraded from -2.5% to -3.0% – showing that manufacturing doom and gloom is not just consigned to the British economy.
The US service sector PMI slowed from 55.1 to 54.4 unexpectedly but perhaps the biggest shock was the untelegraphed dip in US consumer confidence from 102.9 to 97.6, which all but provided the final nail in the coffin to the possibility of a rate hike from the Federal Reserve in October. The Fed is due to announce its latest plans for monetary policy later this evening.
Canadian Dollar
The Canadian Dollar failed to take advantage of the slowdown in UK economic growth yesterday as falling crude oil prices weighed on the commodity-sensitive ‘Loonie’.
The Sterling to Canadian Dollar exchange rate rose by around a cent yesterday in reaction to the latest dip in oil prices, which came as a result of rising supply expectations. The ‘Loonie’ was also hurt by the downbeat US durable goods orders print, which has a historical correlation with the Canadian economy because US durable goods are often produced with raw materials imported from Canada.
Australian Dollar
The Pound initially lost out to the Australian Dollar yesterday but Sterling surged to a 100-pip gain during the afternoon as a plunge in risk sentiment following the downbeat US consumer confidence report drove GBP/AUD through technical resistance.
New Zealand Dollar
The Pound suffered a half-cent decline against the ‘Kiwi’ Dollar yesterday following the lower-than-anticipated UK growth report. But demand for the UK tender increased during the afternoon as global risk sentiment tumbled and the ‘Kiwi’ began to weaken.
Data Released Today
12:30 USD Advance Goods Trade Balance (SEP)
18:00 USD Federal Open Market Committee Rate Decision (OCT 28)
20:00 NZD Reserve Bank of New Zealand Rate Decision (OCT 29) High