· UK construction output improves
– Service sector PMI on tap.
· Disappointing Eurozone inflation hurts Euro
– CPI prints at 0.2%, underwhelming forecasts for 0.4%.
· ‘Cable’ falls to new eight-month low
– Risk aversion grips markets.
· Commodity bloc in trouble
– Risk assets slump.
Sterling
Construction output outpaced analysts’ expectations in December, it was reported yesterday. Markit Economics announced that activity in the construction sector accelerated from a seven-month low of 55.3 in November to a robust score of 57.8 last month. Unseasonably warm weather was cited as a positive impact on the reading because it allowed builders to continue working for longer last month and there is every chance that the sector could continue to improve if the devastating floods stoke demand for new projects this month.
The Pound was only slightly boosted by the numbers because construction accounts for less than 8% of total economic activity in Britain. This morning’s service sector PMI report, which makes up more than 70% of GDP, should have more of an impact on Sterling. Traders are primed for a slight downtick in output from 56.0 to 55.6.
Euro
The Pound to Euro exchange rate rallied by around 70 pips yesterday as demand for the single currency dropped off following another disappointing consumer price index report.
Following on from Monday’s soft German CPI print, the Eurozone inflation index came in at 0.2%, underwhelming analysts’ expectations of 0.4%. It was the usual suspect of falling energy prices that drove the index lower, but slower growth in food and services prices also weighed. Taken alone the downbeat figures were not enough to push European Central Bank stimulus bets too hard. However, we could see further downward pressure on the Euro if inflation continues to stutter close to the 0% mark through the first half of 2016.
US Dollar
‘Cable’ tumbled to a fresh eight-month low yesterday as the People’s Bank of China (PBoC) was forced to intervene again in the stock market to stabilise prices in China. This drastic move was seen as a worrying sign for global markets and subsequently investors’ appetite for risk weakened, which in turn prompted a flurry of flights to safety into the safe haven US Dollar.
The ‘Greenback’ stands to gain later this week if markets start to increase their Federal Reserve rate hike bets inline with the central bank itself. The Fed currently projects 100 basis points of further rate increases in 2016 while markets are only betting on 50 basis points at this juncture. If this evening’s FOMC minutes report boosts Fed sentiment then the ‘Greenback’ could continue to appreciate. If Friday’s non-farm payroll report impresses we could easily see GBP/USD sink to a new five-and-a-half-year low.
Canadian Dollar
Sterling ticked mildly higher against the Canadian Dollar yesterday afternoon as oil prices continued to slide, which reduced the appeal of the commodity-correlated ‘Loonie’.
Tensions in the Middle East, most prominently the latest flare up between Saudi Arabia and Iran, had allowed ‘black gold’ to climb as investors hedged against disruptions in the supply chain. However, this blip didn’t last long and the primary drivers behind oil’s move lower – lack of an OPEC output limit, supply overtaking demand, Iran and USA returning to the market – resumed.
Australian Dollar
The Pound rallied by around a third of a cent against the Australian Dollar yesterday as markets decided that Chinese intervention in the domestic equity market was not enough to halt the plunge in global stocks and shares. Fears are growing that with commodity prices slumping and the Federal Reserve hiking rates we could be on the verge of another global recession. The jury’s still out on this downbeat assessment, however, it is entirely possible that we could see the high-risk ‘Aussie’ depreciate later this week if markets begin to increase their 2016 Fed rate hike expectations.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate increased in value by almost a cent yesterday as risk aversion gripped markets and demand for the ‘Kiwi’ was hampered by a -1.6% decline in dairy prices at the latest Fonterra Group auction.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (DEC) Medium 55.6
15:00 USD ISM Non-Manufacutring Composite (DEC) High 56
15:00 USD Factory Orders (NOV) Medium -0.2%
19:00 USD U.S. Fed Releases Minutes from Dec. 15-16 FOMC Meeting High