Headlines
• UK construction PMI slows –
Sterling tumbles.
• Eurozone inflation disappoints –
Markets ready for ECB stimulus.
• ‘Cable’ hits seven-month low –
Fed’s Yellen talks up December hike.
• BOC holds rates at 0.5% –
GBP/CAD depreciates two cents.
Sterling
The Pound performed terribly yesterday. Sterling lost ground against all of the majors as UK construction activity slowed unexpectedly to its lowest level since April. A sharp contraction in housebuilding – the worst score for two years – drove the headline index down from 58.8 in October to 55.3 in November, which massively undershot expectations of 58.5.
The disappointing print hurt Bank of England rate hike expectations and raised fears that the UK economy could have started to slow in the final quarter of 2015. However, this morning’s service sector report, which accounts for over 70% of GDP, could prompt a rebound in demand for Sterling if it prints at 55.0 as anticipated.
Euro
The Euro struggled against most of its most-traded currency peers yesterday as a weaker-than-expected inflation print stoked bets that the European Central Bank would unleash a raft of new stimulus measures during today’s meeting.
The latest Eurozone CPI print showed that price pressures remained muted at 0.1% in November, which disappointed forecasts of a minimal rise to 0.2%. Markets now forecast a further -10 basis point cut to the deposit rate, a €10 billion boost to the bank’s asset purchasing scheme and a six month extension to the QE programme. But many investors expect ECB President Mario Draghi to go further and we could see the single currency weaken if ‘Super’ Mario decides to give the bank’s stimulus programme an even bigger boost.
GBP/EUR actually declined yesterday, despite the soft Eurozone inflation report, but that means there is room for improvement today if markets are pleased with December’s ECB policy statement.
US Dollar
The Pound to US Dollar exchange rate resembled a lemming walking over a cliff yesterday. Sterling plunged by around 170 pips during the London session before bottoming out at a seven-and-a-half-month low.
The downbeat UK construction report started the descent and the Pound’s downfall accelerated when US labour data showed that 217,000 new jobs were created last month. The decent ADP numbers were seen to bode well for Friday’s more influential non-farm payroll report.
GBP/USD’s fatal fall worsened when Federal Reserve President Janet Yellen told reporters that the US economy could be driven into recession if policymakers were to delay raising rates for too long. Yellen paved the way for a December rate hike with comments indicating that recent economic data ‘has been consistent with [the Fed’s] expectations of continued improvement in the labour market…[which] helps strengthen confidence that inflation will move back to out 2.0% objective over the medium term’.
The hawkish remarks soothed anxieties among those rare analysts who were not yet convinced that the US central bank will raise rates this month and subsequently ‘Cable’ dipped below a significant psychological support level to strike a new seven-month low.
Canadian Dollar
The Pound fell by around two cents to a monthly low against the Canadian Dollar yesterday as poor domestic data impacted the UK tender while the ‘Loonie’ was energised by the Bank of Canada’s decision not to cut interest rates.
The BOC left rates unchanged at 0.50% but hinted that policymakers were happy to remain on the sidelines throughout much of 2016 even though the Fed looks set to liftoff later this month.
Australian Dollar
The Pound to Australian Dollar exchange rate slumped by around -150 pips yesterday to reach a fresh five-month high.
Price action was driven by soft UK data and a booming Australian growth report, detailing that economic activity accelerated from 0.2% to 0.9% in the third quarter. The upbeat GDP figures drove the annualised indicator up from 2.0% to a better-than-forecast 2.5%.
New Zealand Dollar
Sterling suffered losses of around -75 pips against the New Zealand Dollar yesterday to complete a miserable day on the currency market. It seems that when GBP/USD tumbled through significant support the Pound was sling-shotted lower against most of the other majors too.
Data Released Today
09:30 GBP Markit/CIPS UK Services PMI (NOV) Medium 55.0
10:00 EUR Euro-Zone Retail Sales (YoY) (OCT) Medium 2.6%
12:45 EUR European Central Bank Rate Decision (DEC 3) High 0.05%
12:45 EUR ECB Deposit Facility Rate (DEC 3) High -0.30%
13:30 EUR ECB President Draghi Speaks at Press Conference High
15:00 USD Factory Orders (OCT) Medium 1.4%
15:00 USD Yellen Appears Before Congressional Joint Economic Committee High
15:00 USD ISM Non-Manufacturing Composite (NOV) High 58.0