GBP/EUR – Impact of Weak UK Services PMI Limited
As MPs debated Theresa May’s Brexit proposal ahead of next week’s critical vote the mood towards the Pound improved, driven by hopes that a no-deal Brexit will be avoided.
This helped to limit the negative impact of November’s unexpectedly weak UK services PMI, which slumped from 52.1 to 50.7 to fall into a state of near stagnation.
Even so, the decline points towards a greater slowdown in the fourth quarter gross domestic product, with the service sector accounting for almost 80% of the UK’s economic output.
As long as evidence of a weaker fourth quarter and slowing economic momentum continue to mount, however, GBP exchange rates are likely to remain biased to the downside.
GBP/USD – Brexit Speculation Offers Boost to Pound
While concerns remain over UK businesses’ readiness for Brexit this was not enough to keep the Pound on a downtrend for long, as market focus increasingly turned towards the parliamentary debate.
Investors were encouraged to bet that the risk of a no-deal Brexit has diminished after MPs gained greater power to avert an exit via the cliff-edge in the event of May’s deal being rejected.
Although it remains to be seen whether anything will come of this latest shift in power within Parliament this still shored up GBP exchange rates in the face of underwhelming domestic data.
However, a significant defeat of the proposed Brexit agreement next week could easily prompt the Pound to slump sharply across the board.
USD/GBP – US Dollar Struggles to Shake Off Fed Reticence
With the Federal Reserve looking on track to raise interest rates at a more gradual pace in the year ahead support for the US Dollar has eased.
A solid improvement in the ISM manufacturing index was not enough to push USD exchange rates higher on Monday thanks to a general improvement in market risk appetite.
Bets that trade tensions between the US and China could continue to thaw in the wake of the G20 meeting, and agreed postponement of fresh tariffs, limited the appeal of the safe-haven USD.
Further weakness could be in store with the release of November’s non-farm payrolls report, which may show that the labour market struggled to tighten further.
Unless the data impresses, showing fresh signs of tightening, the mood towards the US Dollar is unlikely to pick up.
EUR/USD – Improved Italian Services PMI Benefits Euro
A surprise recovery in November’s Italian services PMI offered a boost to the Euro as the sector climbed out of contraction territory.
Although worries over the outlook of the Italian economy persist this improvement, coupled with signs that Italy’s government is willing to compromise on its 2019 budget, gave EUR exchange rates a leg up.
However, confidence in the outlook of the Eurozone as a whole remains generally limited, with signs still pointing towards a continued loss of momentum in the fourth quarter.
Another contraction in German factory orders or industrial production could see the single currency trending lower ahead of the weekend, with 2018 looking set to end on a low note for the Eurozone’s powerhouse economy.