Sterling
British data yesterday showed that construction output accelerated slightly in February thanks to growth in civil engineering. The UK storms appeared to have little impact on the sector, however, housing projects and commercial building work did slow. The PMI inched higher from 52.2 to 52.5 but the Pound was little changed following the result as construction accounts for less than 7% of total GDP.
Today’s service sector report, which makes up over 70% of the UK’s economic output, is likely to prove far more influential in terms of Sterling trading. Markets are primed for the PMI to slow from 54.5 to 54.0. Anything below 54.0 could damage demand for the Pound, while anything above 55.0 could set off a rally in Sterling’s favour.
Euro
The Pound to Euro exchange rate snapped a run of four daily defeats yesterday, rising by around a quarter of a cent despite the fact that Eurozone unemployment printed at its highest level for four years.
Following strong showings earlier on in the week for Italy and Germany, the Eurozone CPI figure jumped from 1.8% to 2.0% for February. However, with core inflation, which strips out volatile food and energy prices, remaining subdued at 0.9% the European Central Bank is not expected to start tightening monetary policy in any kind of a hurry. Back in 2011 the ECB hiked rates prematurely and swiftly had to loosen policy as the Eurozone debt crisis spiralled close to the brink of destruction. Policymakers will not want to repeat that mistake.
US Dollar
GBP/USD struck a fresh six-week low yesterday as traders continued ratcheting up bets that the Federal Reserve would raise interest rates in the near future.
The futures market indicated that there was a 75% chance of a Fed rate hike in March, up from 66% on Wednesday and less than 30% on Tuesday. The surge in hike bets reflects a shift in mood from officials at the central bank, with numerous policymakers making hawkish comments earlier this week. President Donald Trump’s fairly innocuous address to the Congress earlier in the week, which threw up no fresh concerns, also appears to have boosted the rate outlook.
The only key US ecostat released yesterday showed that US jobless claims plunged to a 44-year low of 223,000 last week, beating forecasts of 243,000. And the ‘Greenback’ stands to gain again today if this evening’s speech from Fed Chairwoman Janet Yellen confirms expectations of a rate hike this month.
Canadian Dollar
Despite news that the Canadian economy blew economists’ forecasts out of the water in December, with an annualised score of 2.6% compared to estimates of 2.0%, the Canadian Dollar lost ground versus the Pound yesterday.
The GDP report showed that a robust rise in household consumption was enough to offset a dip in business investment, which has now fallen for nine consecutive quarters. However, the Bank of Canada’s dovish statement on Wednesday, combined with the recent shift in rate hike bets south of the borders, meant that demand for the risk sensitive ‘Loonie’ remained soft. GBP/CAD rose by around 35 pips.
Australian Dollar
Sterling rebounded from a five-week low yesterday, rallying almost two cents as risk assets suffered from the latest surge of Fed rate hike bets. The fear for commodity-correlated currencies such as the ‘Aussie’ is that higher borrowing costs in the US – the world’s largest economy – will lead to less demand for higher yielding, but more volatile, asset classes.
However, there were some signs of encouragement for the Antipodean: Reserve Bank of Australia official Lael Brainard said ‘it will likely be appropriate soon to remove additional accommodation’, hinting that rates could begin to rise in the foreseeable future.
New Zealand Dollar
The Pound to New Zealand Dollar exchange rate appreciated by around 160 pips yesterday as global risk aversion trends negatively impacted demand for the ‘Kiwi’ Dollar.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (FEB) Medium 54
10:00 EUR Euro-Zone Retail Sales (YoY) (JAN) Medium 1.5%
18:00 USD Yellen Gives Economic Outlook Speech in Chicago High