Sterling
The Pound tumbled to fresh yearly lows yesterday morning but managed to mount a miniature recovery by midday as investors reacted positively to data showing the UK’s dominant service sector performed well in September.
The latest service sector PMI report came in at 52.6, beating expectations of 52.2, thanks to sturdy levels of activity and new business – especially from foreign clients taking advantage of the weaker Pound. The robust performance of the UK’s private sector suggests that, contrary to initial estimates following the EU referendum, Britain will probably not slide into recession in the second half of 2016. The upbeat data presents a quandary for the Bank of England, who previously signalled that rates would probably be slashed in November. The problem is that current growth rates do not necessitate looser monetary policy but inaction risks a harder landing if forecasts of economic turmoil do turn out to be correct – albeit premature.
Euro
The Pound to Euro exchange rate hit a fresh three-year low yesterday but Sterling recovered following the services PMI to end the day around a quarter of a cent stronger than it began.
Data from the Eurozone was less helpful for the single currency, with the composite of Eurozone private sector activity slowing to a 20-month low of 52.6. However, the Euro remained propped-up versus the Pound due to fears that UK Prime Minister Theresa May’s plans to rein-in immigration at the expense of access to the single market will negatively impact Britain’s trade prospects, and subsequently drive the government’s overbearing budget deficit even higher.
A consultancy group, Oliver Wyman, forecast yesterday that May’s likely ‘hard Brexit’ could cost the city of London 35,000 jobs and reduce tax revenue by £5 billion per year. The report mirrors anxieties that have weighed on the Pound recently, although the numbers do appear a little skewed to the upside.
US Dollar
‘Cable’ touched a fresh three-decade low yesterday morning but managed to strike back with a 20-pip rally later in the day thanks to another sanguine UK PMI report.
The prospect of recession in 2016 looks almost impossible now, with all three private sector reports for September showing sturdy, better-than-anticipated growth. However, it is the UK’s uncertain long-term economic prospects that are sending traders to the ‘sell’ button. A so-called ‘hard Brexit’ could potentially dramatically alter the make-up of the domestic economy, and the current consensus is that it will alter the system for the worse.
Data Stateside showed that non-manufacturing activity surged from 51.4 to 57.1 in September, which reflected positively on the world’s largest economy and was seen to increase the chances of a rate hike in December. However, the figure was not deemed enthusiastic enough to prompt Federal Reserve policymakers into a rate rise in November.
Canadian Dollar
Sterling hit a six-week low versus the Canadian Dollar yesterday and GBP/CAD remains close to those levels. It will only take another depreciation of -150 pips to drive the Pound to a fresh three-year low versus the ‘Loonie’, and there is every chance that investors will drive the embattled UK currency to that level over the next few weeks and months.
Australian Dollar
Sterling traded flatly against the Australian Dollar yesterday as upbeat UK data prevented further losses for the Pound. The Reserve Bank of Australia’s perceived lack of desire to slash rates further is currently providing support to the high-beta ‘Aussie’ Dollar.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate rose by around 60 pips yesterday as a combination of enhanced Reserve Bank of New Zealand easing fears and profit-taking stances helped Sterling rise from the all-time low it struck earlier in the week.
Data Released
13:30 CAD Building Permits (MoM) (AUG) Medium 1.0%