Sterling Drifts Lower Ahead of UK Services PMI
The Pound traded broadly lower across the board yesterday as UK construction activity softened. The Construction output PMI came in at 54.8 in June, down from 56.0 in May and lower than forecasts of 55.0. Decelerations in business activity, which hit a 17-month high in May, new orders and employment were to blame for the softer print.
Sterling investors were not overly worried by the construction print, as it only accounts for around 6% of UK GDP, but they were concerned that a trend could be forming. Indeed, the manufacturing PMI dipped two points from 56.3 to 54.3 on Monday and this morning’s service sector report is tipped to slide from 53.8 to 53.5.
If the highly influential services PMI, which makes up over 70% of British growth, also comes in lower-than-anticipated then it could provoke further Sterling sell-offs as markets begin to question the prospect of a Bank of England rate hike.
GBP/EUR Flat as ECB Official Strikes Dovish Tone
The Pound to Euro exchange rate held steady yesterday as dovish European Central Bank rhetoric met bearish UK private sector data.
The ECB’s chief economist Peter Praet acknowledged that the bank’s stimulus scheme had ‘brightened economic prospects’ in the currency bloc and was helping drive inflation towards target, however, Praet argued that it was too early to stop the asset purchases.
The ECB’s chief economist called for ‘patience’ and stated that inflation expectations, which point to Eurozone CPI hitting target in the medium term, are reliant on easy financing conditions during that period.
The dovish rhetoric dampened demand for the single currency as it appeared to pour cold water on hopes of a winding down of QE.
GBP/USD Down Ahead of Federal Reserve Minutes Report
The Pound to US Dollar exchange rate inched lower yesterday by around 20 pips as underwhelming UK construction data raised the risk of a clean sweep of disappointing private sector reports in June.
‘Cable’ could easily sustain steeper losses later this morning if the dominant British services PMI points to a significant slowdown in domestic growth around the time of Theresa May’s botched snap election. The election, and ensuing hung parliament, would go some way to explaining the drop-off in business investment.
However, with the spectre of Brexit hanging over the UK economy, investors know that any loss of momentum could prove problematic in terms of British growth prospects.
On the other hand, a surprisingly resilient services score could propel Sterling higher and breathe life into BoE rate hike bets.
The other key event to look out for is this evening’s minutes report from the Federal Reserve. Markets do not agree with the Fed’s assessment that US rates will rise one more time in 2017, meaning that there is scope for US Dollar moves in both directions.
A robust, hawkish message could persuade investors that the Fed means business, and would therefore bolster the appeal of the ‘Greenback’. While a more cautious approach, in light of the recent softening of US data, could hand the Pound a lifeline versus the US Dollar.
GBP/CAD Strikes 2.5-Month Low as BoC’s Poloz Talks Up Rate Hike Prospects
Sterling weakened by over a cent to a two-and-a-half-month low versus the Canadian Dollar yesterday as traders piled into the ‘Loonie’ following another hawkish hint from Bank of Canada Governor Stephen Poloz.
Expectations for monetary tightening at next week’s BoC meeting rose above 50% following Poloz’ assertion that monetary policy must anticipate where the economy will be in 18-24 months.
The remarks were especially significant considering that the central banker also stated that Canadian inflation should be well into an uptrend by the first half of 2018.
Pound to Australian Dollar Exchange Rate Jumps a Cent on Dovish RBA Statement
The Pound jumped higher by over a cent versus the Australian Dollar yesterday as the Reserve Bank of Australia left rates on hold at 1.50% and poured water on expectations of a near-term hike.
The RBA noted that a stronger domestic currency could complicate the nation’s adjustment to lower levels of mining investment and highlighted that consumption growth and average earnings remain subdued.
The dovish rhetoric was interpreted by currency traders as a clear sign that the RBA has no intention of raising rates anytime soon and this weighed on the ‘Aussie’ Dollar.
Pound to New Zealand Dollar Down 50 Pips Ahead of Service Sector PMI
The Pound to New Zealand Dollar exchange rate softened by around half a cent yesterday as investors sold Sterling ahead of this morning’s UK service sector report.
Data Released
GBP Markit/CIPS UK Services PMI (JUN)
EUR Euro-Zone Retail Sales (YoY) (MAY)
USD FOMC Meeting Minutes (JUN 14)