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UK service sector prints at 55.5
– Slightly lower-than-expected.
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Sterling weakens versus Euro
– Eurozone private sector running at four-year high.
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‘Cable’ falls to new eight-month low
– ADP employment rises 257,000.
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Commodity bloc down on risk aversion
– Oil at 11-year low, Yuan down, N. Korea tests missiles.
Sterling
British service sector output, which accounts for over 70% of total British gross domestic product, grew at a pace of 55.5 in December (where 50.0 represents the borderline between expansion and contraction). The print was down on November’s score of 55.9 and slightly lower than the median market forecast of 55.6. The report had a mild dampening effect on demand for Sterling against the Euro and the US Dollar, but the Pound was able to appreciate against the commodity bloc as risk aversion gripped markets in response to an escalation of events in Asia.
Euro
Sterling weakened by around -80 pips against the Euro yesterday in response to news that Eurozone private sector growth hit a four-and-a-half-year high of 54.3 in December. Ireland led the way with a two-month high of 59.2, Italy followed with a 58-month high of 56.0 and Spain also impressed with a robust two-month high of 55.2.
The single currency was also boosted by remarks from European Central Bank policymaker Peter Praet suggesting that the ECB is not preparing to unleash further stimulus to drive inflation higher. Praet admitted that current policy had ‘not yet been successful’ but stated ‘there is no plan B, there is just one plan…if we look at the economic situation, I think that the current policy will certainly be in place until March 2017’.
The Euro is likely to remain insensitive to a labour market report this morning, which is anticipated to show that unemployment remained high at 10.7% in November. But demand for the common currency could tick higher if retail sales match analysts’ forecasts of 2.0%.
US Dollar
Sterling depreciated by around half a cent against the US Dollar to reach a new eight-month low yesterday as markets reacted to some decent data out of the United States.
The ADP employment change indicator shot up from 211,000 to 257,000, smashing expectations of 198,000, which prompted some investors to increase their projections for Friday’s non-farm payroll report. However, let it be noted that the ADP and NFP have often deviated significantly in the past.
Additionally, the Federal Open Mark Committee (FOMC) released the minutes from their December meeting, which saw the committee vote to raise rates for the first time in nine years. The minutes showed that the decision to hike rates was unanimous and that most policymakers were confident that inflation would begin to rise back towards the 2.0% target in the medium term. Domestic factors such as jobs growth, business spending and the housing market were also seen to be improving at a pace consistent with a tightening of monetary policy.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by around a cent yesterday as analysts reacted to rising tensions between Iran and Saudi Arabia and pushed oil prices lower by -2% to around $35 per barrel.
Oil prices plunged to fresh 11-year lows as investors bet that Riyadh’s decision to cut diplomatic ties with Tehran would hamper the prospect of the two oil-producing nations working together in the near future to curb production and drive prices higher. This negative crude sentiment consequently weighed on demand for the commodity-sensitive ‘Loonie’.
Australian Dollar
Sterling surged to a fortnightly high against the Australian Dollar yesterday as the People’s Bank of China (PBoC) intervened in the currency market twice to allow the Yuan to depreciate to its lowest level in five years. On Wednesday morning the PBoC cut its fix by 0.5% and the central bank acted again earlier this morning to cut the fix by a further 0.6%.
These significant moves were the largest since August when the Chinese stock market went into meltdown and shed a third of its value and the market reaction has been to sell riskier assets in case the situation deteriorates further. GBP/AUD rallied around three cents in response.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate also struck a two-week high earlier this morning as risk appetite plunged in response to the PBoC’s latest interventions in the currency market, which many saw as a sign that the Chinese Dragon could be in for another crash landing.
The latest plummet in oil prices and concerns regarding claims from Pyongyang that North Korea launched a ‘spectacularly successful’ hydrogen bomb test earlier this week also hurt the risk-sensitive ‘Kiwi’, helping GBP/NZD to appreciate by around two cents.
Data Released
10:00 EUR Euro-Zone Unemployment Rate (NOV) Medium 10.7%
10:00 EUR Euro-Zone Retail Sales (YoY) (NOV) Medium 2.0%
13:10 CAD Bank of Canada’s Poloz speaks in Ottawa Medium