Sterling
Data yesterday showed that Britain’s dominant service sector grew at its slowest pace for three years in February. The shock PMI result saw output cool from 55.6 to 52.7, massively undershooting analysts’ expectations of 55.1.
A perfect storm of uncertainty, deriving from wave upon wave of ‘Brexit’ speculation, headwinds from the melee in Asian markets and the oil price plunge, has finally started to erode confidence at service sector firms across the country. The dominant services industries account for over 70% of the UK economy and as such the huge PMI miss is likely to lead to significant repercussions further down the line. If businesses have not been holding back on new investments just yet, they are very likely to after this result and as the EU referendum on June 23 approaches.
Sterling weakened against most but not all of its major currency peers following the downbeat report
Euro
The Pound to Euro exchange rate remained below critical psychological resistance yesterday, depreciating by around a quarter of a cent following the disappointing UK service sector PMI print.
Considering the drastic nature of the three-year low services score Sterling was fairly lucky to get away with only minimal losses against the single currency yesterday. It seems that GBP/EUR was buffeted by bets from traders that the European Central Bank will loosen monetary policy next week.
So looking ahead: the Pound is liable to strengthen minimally over the next week as ECB stimulus bets soar before resuming its downtrend in the run-up to the EU vote. If Briton’s opt to remain in the 29-nation bloc then Sterling should rebound, if not the decline will accelerate.
US Dollar
‘Cable’ appreciated by almost a cent yesterday to strike a fresh 10-day high despite the disappointing domestic services data.
The US Dollar suffered during the afternoon when Markit’s American PMI printed in negative territory at 49.7. Investors interpreted the dud result, the first contraction since October 2013, as another sign that policymakers will not vote to raise rates again this month. The Federal Reserve is currently projected to raise rates by around 50 basis points this year, which is down on December’s forecast of 100 basis points of hikes in 2016.
It will be interesting to see how GBP/USD responds to this afternoon’s highly influential US non-farm payroll figure. The headline labour market gauge is tipped to come in just shy of 200,000 at 193,000, which should settle investors’ nerves and work in the US Dollar’s favour.
However, a lower-than-expected result or a slowdown in wage growth could easily put pressure on the ‘Greenback’ and possibly spur further Sterling strength.
Canadian Dollar
The Pound strengthened against the Canadian Dollar yesterday by around 70 pips during the New York session. Oil prices, which often have a strong bearing on demand for the ‘Loonie’, actually rose on hopes of an output pact between producers. This means that the GBP/CAD gains were likely driven by cross-flows from Sterling’s daily gains versus the US Dollar.
Australian Dollar
The Pound to Australian Dollar exchange rate tumbled by around a cent yesterday, bringing GBP/AUD to its lowest level in almost ten months. The ‘Aussie’ was able to maintain positive momentum from a much-better-than-anticipated GDP report earlier in the week and also drew support from risk-on traders who bet that the recent slide in US data had made a near term rate hike from the Federal Reserve very unlikely.
New Zealand Dollar
Sterling plunged by around -150 pips against the New Zealand Dollar yesterday as markets sold the Pound following the shocking three-year low service sector print. The risk-sensitive ‘Kiwi’ also capitalised on a drop in Fed rate hike bets to compound GBP/NZD’s losses.
USD Change in Nonfarm Payrolls (FEB) High 193k
13:30 USD Unemployment Rate (FEB) High 4.9%
13:30 USD Average Hourly Earnings (YoY) (FEB) Medium 2.5%
15:00 CAD Ivey Purchasing Managers Index s.a. (FEB) Medium 58