Sterling
It’s a strange day when a seven-year low construction PMI result helps boost Sterling higher across the board, but that’s what happened yesterday. The updated July construction index came in at 45.9, down from 46.0 but significantly higher than forecasts of 44.0. The better-than-anticipated figures helped to insulate the Pound against any losses yesterday morning.
Sterling continued to trade positively through the afternoon, registering sizable gains versus all of its major currency peers in what appeared to be a case of ‘short covering’. Short covering is the process of buying back into an asset to conclude a short position. This process of locking-in profit often has the consequence of sending an asset higher, however, because this rally is not based on fundamentals the asset often gives back these gains fairly swiftly.
Yesterday’s probable short covering rally means that Sterling is currently trading at its best rate in weeks versus some of the majors. This is especially relevant seeing as GBP could easily depreciate significantly by the end of the week if the Bank of England opts to unleash aggressive stimulus, as many analysts expect.
Euro
The Pound to Euro exchange rate rebounded from a 20-day low yesterday with a surprise 80-pip appreciation. It seems that the contractionary, but better-than-expected, construction numbers combined with a short cover rally helped drive GBP/EUR higher.
The main event on the calendar this morning is the UK service sector report. Markets are primed for a score of 47.4, which would represent the worst score for 88-months. With UK economic sentiment already weak, following the ‘Brexit’ vote and subsequent shift in BoE policy outlook, it will be interesting to see how investors react to the services print.
If the reading is roughly inline with market expectations then the Pound will probably avoid defeat. If the report shows that the dominant service sector, which accounts for over 75% of UK economy output, contracted more sharply then Sterling is liable to suffer sizable losses. And if the PMI prints above forecast then we could see the Pound to Euro exchange rate strengthen during the morning session.
US Dollar
‘Cable’ surged higher by around 150 pips yesterday to strike its highest level in a fortnight. It was a mixture of short covering, which boosted the Pound, and reduced Federal Reserve rate hike bets, which weighed on the ‘Greenback’, that drove GBP/USD higher.
Considering that the Bank of England appears ready to inject a significant new stimulus package into the UK economy, the Pound may struggle to hold onto yesterday’s gains against the US Dollar.
Sterling’s first hazard is this morning’s UK service sector report, which is forecast to print at 47.4, significantly lower than the 56.0 figure expected in the US equivalent later this afternoon. The next, and much more explosive risk, is Thursday’s BoE announcement, which many analysts forecast will see the UK central bank embark on aggressive policy easing that will eventually drag the Pound to US Dollar exchange rate down to a new three-decade low.
Canadian Dollar
The Pound to Canadian Dollar exchange rate struck a monthly high yesterday after leaping 170 pips, in what appeared to be a case of investors buying back into the Pound to settle short positions. In short, Sterling could become susceptible to sharp swings over the next few days if traders decide the Pound’s recent rallies have been overdone. Indeed, few expected the UK currency to mount such a sturdy market-wide rally just a few days before the Bank of England’s highly awaited policy announcement.
Australian Dollar
The Pound strengthened by around half a cent against the Australian Dollar yesterday as markets reacted to the Reserve Bank of Australia’s decision to cut interest rates to a new record low of 1.50%. The 25 basis point cut was largely factored into the ‘Aussie’ but traders still saw it fit to give the Antipodean currency a little bit of a grilling following the announcement.
New Zealand Dollar
A freakish jump in demand for Sterling, most likely the result of a short covering rally, drove the Pound to New Zealand Dollar exchange rate higher yesterday. The UK currency’s gains were especially surprising against the ‘Kiwi’ Dollar seeing as New Zealand dairy prices rose 6.0% at the latest GlobalDairyTrade auction – and usually the New Zealand Dollar is able to attract demand following surges in value of the nation’s most lucrative export.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (JUL F) Medium 47.4
10:00 EUR Euro-Zone Retail Sales (YoY) (JUN) Medium 1.8%
15:00 USD ISM Services/Non-Manufacutring Composite (JUL) High 56