Headlines
• UK services PMI impresses –
Sterling rallies versus most majors.
• ECB easing disappoints –
Euro spikes 250 pips as investors revaluate.
• ‘Cable’ recovers from seven-month low –
GBP/USD rises 200 pips.
• Pound up vs. commodity bloc
– As risk sentiment falters.
Sterling
It was a day of revenge for the Pound yesterday as Sterling enacted gains against all of the majors bar the Euro.
British service sector output came in stronger-than-anticipated for November at a four-month high of 55.9, which eased concerns that the economy started to slow in the final quarter of the year. The upbeat services score suggests that, even though construction and manufacturing output cooled, British GDP could actually accelerate from 0.5% to 0.6% in Q4 because tertiary activity accounts for more than 70% of total economic output.
The potent services PMI score helped the Pound garner support yesterday but Sterling was also boosted by an announcement in Frankfurt…
Euro
The Pound to Euro exchange rate plummeted by around -250 pips yesterday to strike a monthly low in the largest one-day decline since June as markets reacted to an underwhelming European Central Bank policy announcement.
Increasingly dovish remarks from ECB policymakers, and from President Mario Draghi in particular, had caused investors to forecast a powerful new package of stimulus measures. Markets were primed for a cut to the deposit rate of 10 basis points or more, an extension of the QE programme for at least an extra six months and a boost of at least €10 billion to the monthly asset purchasing programme.
However, speaking in Frankfurt, the not-so-‘super’ Mario Draghi announced that the €60 billion asset purchasing target would remain unchanged, which shocked analysts and sent the Euro spiking as traders revaluated the single currency.
Draghi did announce a cut to the deposit rate, from -0.20% to -0.30%, he did prolong the QE programme by a further six months from September 2016 to March 2017 and he even widened the asset purchasing remit to include regional government bonds but, because investors had set the bar for stimulus so high, this triple-pronged easing package was viewed as unsubstantial and the single currency surged.
US Dollar
The Pound rallied by over 200 pips from a seven-month low against the US Dollar yesterday, rising through a number of technical resistance levels as markets adjusted to the less-dovish-than-expected ECB statement.
The Euro rallied by over 250 pips against the US Dollar in reaction to the underwhelming stimulus measures and this had a knock-on effect of weakening the ‘Greenback’ against the Pound. GBP/USD was also helped by the ECB announcement because the Euro’s appreciation against Sterling was seen to bode well for UK manufacturing exports and therefore could make things a little easier for the Bank of England when it decides the time is right to raise rates. The strong Pound to Euro exchange rate has been mentioned many times by BoE policymakers as a reason to hold off on raising rates.
This afternoon’s US non-farm payrolls report is expected to print positively around the 200,000 mark and subsequently we could see demand for the ‘Greenback’ swell as December Federal Reserve rate hike bets grow ever stronger.
Canadian Dollar
Sterling rebounded from a monthly low against the Canadian Dollar yesterday to strengthen almost 250 pips as risk aversion ruled markets following the ECB’s decision not to increase its monthly asset purchasing target. Stimulus hungry investors had hoped for more accommodative policy, which would have driven borrowing costs even lower for even longer.
Australian Dollar
The Pound shot up against the Australian Dollar yesterday afternoon following the ECB’s statement, which underwhelmed analysts’ expectations of a major dovish shift in monetary policy. GBP/AUD jumped higher by around 300 pips in the immediate aftermath of Draghi’s announcement but the pair settled for the day to mark a 150 pip appreciation for the Pound.
New Zealand Dollar
Sterling briefly touched a five-and-a-half-month low against the New Zealand Dollar yesterday but demand for the Pound increased during the afternoon as risk sentiment faltered in reaction to the ECB’s stimulus plans, which undershot market expectations.
Data Released Today
13:30 USD Unemployment Rate (NOV) High 5.0%
13:30 USD Change in Non-farm Payrolls (NOV) High 200k
13:30 USD Average Hourly Earnings (YoY) (NOV) Medium 2.3%