Sterling
Profit-taking following a profound depreciation in the Pound last week helped drive Sterling crosses higher yesterday.
Domestic data came in weakly, with construction activity slowing unexpectedly from 55.0 to 54.2. But just as traders opted against punishing the Pound following Tuesday’s 34-month low manufacturing PMI, investors were happy to let Sterling rise after a 10-month low construction print.
However, there could be more of a damning market response if this morning’s service sector report marks a triple-whammy of disappointments. Traders are currently primed for the highly influential services PMI to slow from 55.6 to 55.1 but anything lower than could potentially launch another move in Sterling’s recent downtrend.
Euro
The Pound to Euro exchange rate rallied by over a cent yesterday to strike a three-week high as further dovish rhetoric form European Central Bank officials weighed on the single currency.
ECB policymaker Benoît Coeuré claimed yesterday it was ‘vital’ for the bank to stimulate economic growth in order to drive inflation up, after the Eurozone’s CPI struck -0.2% earlier this week. Coeuré went on to address concerns regarding negative interest rates by countering that if stimulus is not provided the whole economic system is liable to feel the pain. Analysts interpreted the dovish remarks as a further sign that the ECB will most likely loosen policy later this month and this weighed on the Euro.
GBP/EUR rallied to hit significant psychological resistance at 1.30 but demand for the Pound petered out at this level and Sterling settled slightly lower.
US Dollar
Sterling went one step further against the US Dollar than it did against the Euro yesterday: GBP/USD actually managed to settle above key psychological resistance.
‘Cable’ grew despite UK construction data printing poorly and US employment data – a better-than-expected 214,000 rise in ADP employment – coming in robustly. The day’s market moves appeared to reflect a desire for traders to lock in profit from last week’s heavy GBP/USD depreciation. The fact that Sterling managed to assert itself above key resistance suggests that the Pound could maintain yesterday’s gains, at least in the near term.
If the UK service sector PMI prints decently this morning then the Pound could rally but if the important data release underwhelms GBP/USD could easily slide back down.
Canadian Dollar
The Pound to Canadian Dollar exchange rate rallied by almost two cents yesterday as traders locked in profit from Tuesday’s session when above-forecast domestic GDP numbers boosted economic sentiment in Canada. Following the growth report Bank of Canada rate cut bets were trimmed from 33% to 25% but the ‘Loonie’ still lost ground to Sterling during the London session on Wednesday.
Australian Dollar
The Pound remained under pressure against the Australian Dollar yesterday as sturdy Australian growth figures bolstered the appeal of the ‘Aussie’.
Reserve Bank of Australia rate cut bets were already pretty slim before the GDP report, which showed 0.6% quarterly and 3.0% annual growth in the fourth quarter, and they have only softened further since.
New Zealand Dollar
Sterling strengthened by around 130 pips to a weekly high yesterday as market sentiment favoured the UK currency after a period of dogged negativity. It will be interesting to see whether the Pound holds onto this form following this morning’s highly anticipated UK service sector report.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (FEB) Medium 55.1
10:00 EUR Euro-Zone Retail Sales (YoY) (JAN) Medium 1.3%
15:00 USD ISM Non-Manufacturing/Services Composite (FEB) High 53
15:00 USD Factory Orders (JAN) Medium 2.1%