Headlines
• UK Construction Output Slows
• GBP Declines versus Majors
• Core Eurozone Inflation Unexpectedly Drops
• GBP/EUR Edges Higher before ECB Announcement
GBP/EUR – Weak British Construction Weighs on Sterling Demand
The Pound Sterling to Euro (GBP/EUR) exchange rate was trending in the region of 1.4220 in the early stages of Wednesday’s European session.
Although Sterling declined against several of its peers, the Pound to Euro exchange rate edged higher by around 0.2% after Eurozone inflation data supported speculation that the European Central Bank (ECB) will look to ease policy during tomorrow’s policy gathering.
Sterling’s general depreciation can be attributed to weaker-than-anticipated UK construction output. The UK Construction PMI was predicted to edge lower from 58.8 to 58.5, but the actual result saw output drop to 55.3. In conjunction with yesterday’s slowing manufacturing growth, many traders now fear that fourth-quarter sectoral growth will face similar struggles to the third-quarter. All this is likely to cause the Bank of England (BoE) to delay a benchmark interest rate for some time to come.
Thursday’s British Services data will be particularly significant given that it is the primary driver of British economic expansion. If the data disappoints to the downside the Pound may undergo heavy losses across the board.
GBP/USD – ‘Cable’ Holds Below 1.51 ahead of US Mortgage Data
The Pound Sterling to US Dollar (GBP/USD) exchange rate was trending in the region of 1.5044 during Wednesday’s European session.
Yesterday saw the US asset cool, with the depreciation being initiated by Chinese manufacturing output remaining in negative territory in November. A resurgence in Chinese growth concerns caused many traders to fear that the Federal Open Market Committee (FOMC) will delay a benchmark rate increase. Also weighing on demand for the US Dollar yesterday was domestic manufacturing output which unexpectedly contracted in November.
On Wednesday morning the US Dollar gained on the Euro and Pound. MBA Mortgage Applications and ADP Employment Change data, due for publication during Wednesday’s North American session, have the potential to provoke US Dollar volatility.
USD/GBP – Trending Higher ahead of Fed Speeches
The US Dollar to Pound Sterling (USD/GBP) exchange rate was trending within the range of 0.6631 to 0.6651 during Wednesday’s European session.
Given the odds of UK rate hike delays increasing following weaker-than-anticipated manufacturing and construction output, the Pound is likely to hold losses versus the US Dollar. With that being said, however, uncertainty surrounding the likelihood that the Federal Reserve will lift rates before 2016 is also having a negative impact on US Dollar trade. If emerging market weakness persists, the FOMC may opt to hold rates irrespective of domestic data.
Later during the North American session the US Dollar could see significant volatility in response to several speeches from Federal Reserve officials. The Fed will also be publishing the Beige Book which should give a good indication about the current condition of the US economy.
EUR/USD – ECB Easing Prospects Amplified following Disappointing Eurozone Inflation Data
The Euro to US Dollar (EUR/USD) exchange rate dipped by around -0.4% on Wednesday morning as Eurozone inflation data failed to meet with expectations in November. This damaged demand for the Euro as the European Central Bank (ECB) has already highlighted the absence of Euro-area price pressures as the principle reason for making monetary policy more accommodative. November’s annual Eurozone Consumer Price Index was predicted to advance from 0.1% to 0.2%, but the actual result held at 0.1%. Perhaps more disappointing, however, was Core Inflation which dropped to 0.9% despite the market consensus that core consumer prices would hold at 1.1%.
With the ECB interest rate decision due tomorrow, most analysts now agree that ECB President Mario Draghi will expand monetary stimulus. The question now whether Draghi will expand the current program of quantitative easing, cut the overnight cash rate or do both.