Weak US economic data casts Fed interest rate hike doubts, Sterling and Euro rally
02/Feb/2016 • Currency Updates•
The US Dollar fell against its major peers on Monday after a series of disappointing economic indicator data released in the US. Doubts have increased over whether or not the Federal Reserve would be able to hike interest rates as quickly as forecast in 2016.
Underwhelming manufacturing, construction and consumer spending figures all painted a relatively bleaker picture of US economic strength in the first month of the year. This will be bad news for Fed hawks, following last week’s mixed FOMC meeting which provided few clues regarding the timing of the next US rate hike.
The Pound and Euro both subsequently rallied yesterday, with the former receiving welcome support from a surprisingly impressive manufacturing PMI.
Over in China, there was more weak economic data released on Monday morning which ignited further concerns regarding the health of the world’s second largest economy.
The manufacturing sector of the Chinese economy contracted for the sixth consecutive month and by its fastest rate in three years. A slowdown in China, coupled with stubbornly low oil prices, which yesterday fell 4% back below $32 a barrel, continues to weigh heavily on currencies of emerging market economies, particularly those dependent on commodity exports.
The latest unemployment figures in the Eurozone this morning could provide further support for the Euro if there are any positive surprises.
The real focus, however, will remain on this Thursday’s Bank of England meeting and inflation report, and Friday’s US labour report.
Major currencies in detail:
Encouraging news in the domestic economy and weakness abroad sent Sterling 0.8% higher against the US Dollar on Monday.
The manufacturing sector of the UK economy grew faster than expected last month, with the latest monthly PMI from Markit increasing to a three-month high of 52.9 from 52.1 in December.
Manufacturers mostly shrugged off worries about recent financial market turmoil, with a rise in domestic orders more than outweighing an overall decline in export orders. Yesterday’s data will be welcome news to the sector, which failed to grow in the final quarter of last year amid a strong Pound and weak demand from Europe.
Sterling’s gains were checked, however, after a YouGov poll on Sunday showed the biggest lead for ‘Brexi’ supporters in more than a year over the rival ‘in’ campaign.
January’s construction PMI will receive some attention this morning, and is expected to show a modest deceleration for the first month of the year.
The single currency received strong headwinds on Monday, ending 0.5% higher against the US Dollar.
The latest flash manufacturing PMI from Markit came in right in line with expectations, remaining unchanged at 52.3 for the Euro-area, following acceleration in growth in Spain and Germany.
President of the European Central Bank Mario Draghi spoke yesterday afternoon. He provided little market-moving information. Draghi reiterated that inflation dynamics have been weaker than expected since December, while also suggesting the Eurozone would have entered outright deflation last year had the ECB not intervened.
German and Eurozone-wide unemployment data this morning is not expected to rock the boat, although will be worth noting. Another speech by Draghi on Thursday has potential to be a market mover if he touches on monetary policy.
Poor economic figures sent the US Dollar 0.3% lower against its major peers as markets opened for the week on Monday.
Consumers in the US showed caution in December, despite an overall increase in incomes during the month. Consumer spending was flat in the final month of last year, partly because of lower spending on utilities due to warmer weather in December. This flat reading came despite a modest uptick in incomes, which rose by 0.3% in the same period.
The news provides evidence of a further slowdown in the US in the past few months, after last Friday’s GDP figures showed a modest deceleration in fourth-quarter economic growth.
Today will see limited news in the US, with a speech from Fed member Esther George at 6:00pm London time the highlight. This Friday’s labour report will remain the biggest market mover in the US this week.
Receive these market updates via email