Sterling
The Pound suffered losses against some of the majors on Friday as traders reacted to an unexpected slowdown in UK services output.
The highly influential service sector PMI report, which accounts for over 70% of British GDP, slid from 54.5 in January to 53.3 in February – its lowest level since September. Analysts had pencilled in a more subtle dip to 54.0. Business confidence remained strong but weaker consumer spending figures weighed on the headline index. This is worrying for UK GDP because inflation is on the rise and wage growth has started to slow. The British economy has been remarkably resilient since the Brexit vote, mostly due to consumers’ voracious appetite for spending. However, if household purchasing power continues sliding then growth will likely follow suit.
Many economists, most notably the Governor of the Bank of England, Mark Carney, expect UK growth to soften over the next 12 months and February’s service sector report did little to dispel that argument.
Euro
Sterling tumbled by around -80 pips on Friday to hit its lowest level in almost a month as slowing service sector growth stoked fears that Britain could be heading for stagflation – high inflation and stagnant growth.
Markit Economics, who compiled the PMI report, revised its first quarter GDP forecasts down to 0.4%, following 0.7% growth in Q4. However, some analysts took a much less optimistic stance and predicted that Britain would witness an average of just 0.2% quarterly growth throughout 2017.
The fear is that in the past when the services output price sub-index has risen above 52.0 the economy has tended to slow in the proceeding six months. In February the sub-index spiked at 54.1 – its highest level since 2008 – and subsequently there is a strong possibility that GDP could struggle to maintain the levels of growth it achieved last year.
In contrast, the Eurozone saw business growth hit a near-six-year high of 55.5 in February, with the composite PMI accelerating from 53.7 in January. Private sector performance increased in all of the currency bloc’s largest four economies – Germany, France, Italy and Spain.
US Dollar
The Pound to US Dollar exchange rate slid to a fresh six-week low on Friday morning following the five-month low UK service sector print.
Data out of the world’s largest economy from the ISM showed that service sector output in America ratcheted up from 56.5 to a one-year high of 57.6 in February – smashing forecasts of 56.5. During the evening Federal Reserve Chairwoman Janet Yellen hinted that a March hike would be ‘appropriate’ if the economy continued evolving as anticipated.
Canadian Dollar
Sterling lost ground to the Canadian Dollar on Friday following the morning’s downbeat PMI result, however, the Pound managed to claw back its losses later in the day as Federal Reserve rate hike bets weighed on the ‘Loonie’.
The Canadian Dollar appeared to depreciate following the afternoon’s US ISM non-manufacturing (service sector) PMI, which outpaced estimates and was seen to bode well for US growth and Fed tightening expectations.
Australian Dollar
Despite losing ground versus the Euro and the US Dollar the Pound proved more robust versus the commodity bloc last week. This reflects a market wide theme of risk aversion that has swept through trading rooms this week on the back of a meteoric rise in Federal Reserve interest rate hike bets. CME futures indicate a 75% chance of a rate rise in March, up from under 30% at the beginning of the week, and this shift in sentiment has insulated Sterling’s losses versus the perceived risk currencies – including the ‘Aussie’ Dollar.
New Zealand Dollar
Despite a jump in Chinese private sector output from 52.2 to 52.6 the New Zealand Dollar softened versus Sterling on Friday. China is one of the largest buyer of New Zealand exports so there is often a perceptible boost in demand for the ‘Kiwi’ when Chinese economic prospects are seen to strengthen – but not on this occasion.
GBP/NZD rallied by around 80 pips on the day as Fed hike bets weighed on investors’ appetite for risk.
Data Released
15:00 USD Factory Orders (JAN) Medium 0.9%