Sterling
Sterling suffered sizeable losses against most of the majors yesterday as markets pulled out of the Pound in response to much weaker-than-anticipated UK manufacturing data.
After three years of growth, the factory sector saw output contract in April. As a result the Markit PMI dropped to 49.2. The figure marked a considerable disappointment on forecasts of 51.2 and traders were quick to send Sterling lower following the release. Firms cited soft domestic demand, turmoil in export markets and the upcoming EU referendum as the biggest factors that weighed on activity.
Today’s construction PMI is tipped to print around the 54.0 mark but there is potential for a lower score, if it emerges that construction companies also saw demand drop in the run-up to the ‘Brexit’ vote.
Euro
The Pound to Euro exchange rate plunged -100 pips yesterday as UK GDP expectations and Bank of England (BoE) rate hike bets declined in reaction to the shockingly bad manufacturing numbers.
Across the channel in the Eurozone, traders were treated to a fairly downbeat economic assessment from the European Commission, indicating that growth in the currency bloc will likely come in weaker than initially expected over the next few years. The EC cut its 2016 Eurozone GDP forecast from 1.7% to 1.6% and sliced its 2017 forecast from 1.9% to 1.8%. Officials noted that uncertainty surrounding Britain’s EU referendum posed ‘considerable risks’ to the bloc’s economic outlook.
The Pound has weakened against the single currency since the EU referendum was announced but some analysts argue that, in the long run, a ‘Brexit’ would have wider negative implications for the Euro than Sterling. This argument focuses on the potential for other EU member states to demand new deals or hold referendums of their own, thus posing an existential threat to the currency bloc.
US Dollar
The Pound to US Dollar exchange rate slid from a four-month low yesterday. ‘Cable’ depreciated by around -130 pips as investors reacted acerbically to the damning UK manufacturing numbers, which showed that the sector suffered its worst month of activity since March 2013.
In the United States, sentiment was boosted slightly by a decent New York manufacturing survey, which signalled that business conditions had vastly improved after the index jumped from 50.4 to a five-month high of 57.0 in April.
Federal Reserve policymakers once again attempted to put the possibility of June rate hike back on the table, arguing that next month’s meeting is ‘live’. But once again, investors were not impressed and futures markets continued to point to just a 10% chance of a hawkish move in June.
Canadian Dollar
Sterling managed to strengthen against the Canadian Dollar yesterday as soft data from China hurt risk sentiment and weighed on the commodity-correlated ‘Loonie’. GBP/CAD reached a near-monthly high after rising by over 120 pips.
Australian Dollar
Sterling soared like an eagle against the Australian Dollar yesterday, registering a near-four-cent daily gain, as traders reacted to the Reserve Bank of Australia’s (RBA) decision to slash interest rates to a record low of 1.75%. Markets had been split prior to the result on whether the RBA would stick or twist and subsequently the ‘Aussie’ suffered heavy losses as investors rushed to adjust their positions. RBA Governor Glenn Stevens noted that last week’s surprise decline in consumer prices had prompted the dovish move.
New Zealand Dollar
The Pound strengthened by around two cents against the New Zealand Dollar yesterday as traders bet that the Reserve Bank of New Zealand (RBNZ) would likely follow the RBA in cutting rates further at its next meeting. The risk-sensitive ‘Kiwi’ was also hurt by a dud Chinese manufacturing PMI print of 49.4, which undershot expectations of 49.8.
New Zealand milk prices rose 0.7% at the latest auction, but the minor increase was not deemed enough to bolster the appeal of the ‘Kiwi’, especially seeing as the global dairy price index stumped -1.4%.
Data Released
09:30 GBP Markit/CIPS UK Construction PMI (APR) Medium 54.0
10:00 EUR Eurozone Retail Sales (YoY) (MAR) Medium 2.6%
13:15 USD ADP Employment Change (APR) Medium 195k
15:00 USD ISM Non-Manufacturing/Services Composite (APR) High 54.7