Sterling
Sterling softened slightly versus some of the majors yesterday as a flare-up in Brexit negotiations reminded traders of the risks ahead.
UK construction printed at a four-month high of 53.1 in April, up from 52.2 in March, as civil engineering and residential building projects boomed and new staff were added to the payroll. However, the report failed to lift demand for Sterling as the construction PMI is seen as the least influential of the three private sector gauges. The Pound may prove more sensitive to this morning’s UK service sector report, which accounts for over 75% of domestic output. The tertiary index is predicted to come in at 54.5 but signs of slowdown in the consumer sector point to the possibility of a lower figure that could drive a bout of Sterling selling.
Euro
Eurozone GDP printed positively at 0.5% for the first quarter of 2017, beating both the UK (0.3%) and the US (less than 0.2%). However, the report did not have a major impact on GBP/EUR trading. Investors were more concerned with comments from UK Prime Minister Theresa May accusing the EU of attempting to interfere in the UK general election.
After leaked reports suggested European Commission President Jean-Claude Juncker was ‘ten times’ less optimistic about UK-EU trade relations after meeting the UK PM last week, Chief EU negotiator Michel Barnier said that Britain’s increased €100 billion exit bill was ‘incontestable’. British Brexit Minister David Davis rejected that the UK would pay as much as €100 billion, which was up from previous estimates of €60 billion, and suggested that Britain wouldn’t pay a penny if no trade deal was agreed. These flare-ups led to Theresa May’s accusations that Brussels was trying to interfere with the UK elections.
Although the market reaction was not massive, GBP/EUR dipped by around -25 pips, investors were concerned that the negotiations had reached such a fraught state. This was seen to bode ill for the prospect of a positive Brexit trade deal.
US Dollar
The Pound to US Dollar exchange rate softened by around a 70 pips yesterday as renewed Brexit concerns dampened demand for Sterling and an upbeat Federal Reserve statement bolstered the appeal of the ‘Greenback’.
US service sector activity was reported to have performed better-than-anticipated in April, with a score of 57.5 compared to calls for 55.8. However, the main event for GBP/USD was the evening’s Federal Reserve policy statement, which saw the US central bank leave the door open to a further two rate rises in 2017. Fed Chairwoman Janet Yellen said that policymakers viewed the slow growth in the first quarter as ‘transitory’ and mentioned that inflation was ‘running close’ to the bank’s target. The Fed left rates on hold for the time being but expectations of future tightening meant the US Dollar appreciated following the statement.
Canadian Dollar
Sterling softened over half a cent against the Canadian Dollar yesterday, slipping back from a 10-month high. It was profit-taking that took GBP/CAD lower yesterday although there are speculators who believe that strong economic growth in the North American nation will persuade the Bank of Canada to start hiking interest rates within the next 12 months. This, the ‘Loonie’ bulls argue, will lead to a recovery in demand for the Canadian Dollar.
Australian Dollar
The Pound to Australian Dollar exchange rate rallied by around 150 pips yesterday and came close to striking new multi-month highs. Whereas Sterling ticked slightly lower against most of the majors, the ‘Aussie’ Dollar was unable to take advantage of the drop off in demand for the Pound due to enhanced expectations of additional tightening measures from the Federal Reserve. As a risk-sensitive currency, the ‘Aussie’ Dollar is liable to suffer if borrowing costs are raised in the world’s largest economy.
New Zealand Dollar
The New Zealand Dollar started Wednesday’s session in good form, following a better-than-anticipated unemployment score of 4.9%. The figure marked an impressive drop of 0.3% from the previous reading of 5.2% and subsequently bolstered economic sentiment. However, GBP/NZD managed to rally by around half a cent by the end of the day as rising Fed hike bets dampened demand for perceived riskier assets such as the ‘Kiwi’ Dollar.
Data Released
09:30 GBP Markit/CIPS UK Services PMI (APR) Medium 54.5
10:00 EUR Eurozone Retail Sales (YoY) (MAR) Medium 2.1%
15:00 USD Durable Goods Orders (MAR F) Medium 0.7%
16:30 EUR ECB’s Draghi Speaks in Lausanne, Switzerland High