Headlines
• UK services PMI improves –
54.9 print boosts Sterling.
• GBP/EUR hits 2.5-month high –
ECB easing fears weigh on Euro.
• BoE rate decision on tap –
Quarterly inflation report could bolster rate hike bets.
• Fed’s Yellen talks up December rate hike –
US Dollar surges, riskier currencies plunge.
Sterling
The Pound appreciated against most of the majors yesterday as traders reacted positively to a stronger-than-anticipated service sector score for October. The tertiary PMI index, which accounts for over 70% of total economic output in Britain, jumped from 53.3 to 54.9 last month, beating forecasts of 45.5. The upbeat services report, taken alongside the robust manufacturing and construction PMI scores, is indicative of an acceleration from 0.5% to 0.6% growth at the beginning of the fourth quarter. Whilst this is not enough to warrant an immediate rise in Bank of England interest rates,/ it is further evidence that the economy will be ready for higher rates as soon as inflation prospects begin to pick up and this supported demand for Sterling.
The BoE’s interest rate decision at midday is likely to see the central bank leave rates on hold at 0.50% but the quarterly inflation report could give traders a clue as to when policymakers do intend to alter monetary policy. Some analysts predict that BoE Governor Mark Carney will talk up the possibility of a rate rise in the first half of 2016 this afternoon and if they are correct there is potential for Sterling to rally versus most of the majors.
Euro
The Pound to Euro exchange rate rallied by around a cent to strike a fresh two-and-a-half-month high yesterday as sentiment towards the UK tender improved in reaction to the morning’s decent service sector report.
Demand for the Euro remained depressed due to fears that the European Central Bank will loosen monetary policy further in the near future in an attempt to increase liquidity conditions, boost inflation and weaken the single currency. Indeed, ECB President Mario Draghi noted on Tuesday that he was prepared to provide further stimulus if he and his team at the Governing Council deem it necessary.
This morning’s session is anticipated to show that Eurozone retail sales accelerated from 2.3% to 3.0% but traders will likely be more interested in the BoE’s quarterly inflation report at midday.
Sterling has strengthened by almost six cents against the single currency over the past 15 days, which makes it a very attractive time to purchase Euros with Pounds.
US Dollar
Sterling rallied against the US Dollar yesterday morning when the upbeat UK service sector report hit the newswires but the Pound’s fortunes took a turn for the worse during the afternoon as markets reacted to a hawkish set of comments from Federal Reserve President Janet Yellen.
According to the Fed President there is a ‘live possibility’ of a rate rise in December because an early hike would allow the world’s most powerful central bank to tighten at a ‘gradual and measured’ pace over the next 12-18 months. The hawkish comments put a lot of emphasis on future US data prints, especially Friday’s key non-farm payrolls report.
Data released yesterday printed positively, with ADP employment coming in slightly higher-than-expected at 182,000, ISM non-manufacturing output rising from 56.9 to 59.1 and the trade balance shrinking from -$48 billion to -$40 billion.
Canadian Dollar
A combination of upbeat UK services data, hawkish Fed hike talk and lower oil prices moved traders to sell the Canadian Dollar yesterday. Sterling rose by around a cent against the ‘Loonie’, with most of the Pound’s gains coming during the North American session as crude oil prices declined -3.5% on rising US inventories. The value of Canada’s largest export was also hurt by a report from OPEC suggesting that global demand for the ‘black gold’ will weaken even further over the next few years.
Australian Dollar
The Australian Dollar weakened by around a cent against the Pound yesterday as global risk sentiment softened following Fed Chairwoman Janet Yellen’s comments regarding the possibility of a rate hike in December. Markets adjusted their Fed rate hike bets to show a 60% chance of an increase in borrowing costs at next month’s meeting. The Pound also benefitted from the morning’s upbeat tertiary output numbers.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate jumped higher by almost two cents yesterday to strike a new near-monthly high as risk aversion trends suffocated demand for the high-beta ‘Kiwi’ Dollar.
Data Released Today
10:00 EUR Euro-Zone Retail Sales (YoY) (SEP) Medium 3.0%
12:00 GBP Bank of England Rate Decision (NOV 5) High 0.50%
13:30 USD Initial Jobless Claims (OCT 31) Medium 26