Downward pressure on Sterling remains major concern for UK businesses after PMI miss
06/Apr/2016 • Currency Updates•
Sterling continued to struggle yesterday as concerns over a possible Brexit and the strength of the UK economy remained rife. The Pound was not helped in the slightest by new data released yesterday, showing a sluggish services sector.
With the service industry being a significant contributor to the UK economy, investors saw this as an indicator that economic growth overall would be slow going forward.
Sterling has taken a pounding since the beginning of December, falling to its weakest position in trade-weighted terms in over two years. Implied volatility in the Pound remains around multi-year highs ahead of this summer’s EU referendum.
We believe that this continued downward pressure on Sterling will be a major concern for UK businesses operating in or purchasing from international markets and that’s the reason why many of those businesses have been putting a structured hedging strategy in place. By doing that, businesses buying Dollars or Euros protect themselves against adverse effects a continued Pound depreciation would otherwise have on their bottom line and budgeted levels.
The Japanese Yen edged higher against the US Dollar, to its strongest position against the Greenback in 17 months, on Monday as sentiment in commodity and stock markets soured, fuelling a flow to safe-havens.
Speculation that the Bank of Japan will intervene in the currency market in order to weaken the Yen continues to ramp up, given Japanese policymakers’ aversion to a strong currency.
Elsewhere, the Australian Dollar weakened sharply after the Reserve Bank of Australia maintained interest rates at 2% for the eleventh straight month and left the door open to a rate cut later in the year.
The Reserve Bank of India also cut its interest rate by 25 basis points to 6.5%, as expected, with the Rupee little moved as a result.
Currency markets today will be firmly focused on this evening’s FOMC minutes at 19:00 UK time tonight. While the minutes may not live up to last week’s dovish commentary from Chair Janet Yellen, the Fed may shed some more light on both the pace and timing of interest rate hikes this year.
Today’s non-monetary policy meeting of the European Central Bank is unlikely to affect the Euro, with Euro traders instead focused on the minutes from last month’s Governing Council meeting on Thursday.
Major currencies in detail:
Sterling plunged by 0.6% against both the US Dollar and Euro yesterday, falling further in trade-weighted terms amid increased concerns regarding the state of the UK economy.
The latest services PMI remained subdued in March. The monthly index from Markit rose to 53.7 last month from February’s 52.7, albeit below expectations and still around its weakest level in three years.
Such sluggish growth in the services sector, which accounts for three quarters of the UK economy, suggests that the country’s economic growth likely slowed in the first quarter of 2016 to around 0.4%, down from the 0.6% recorded late last year.
With no economic data out in the UK today, Sterling volatility will likely be driven by events elsewhere and ongoing concerns surrounding the EU referendum.
A late rally in the Euro yesterday meant the single currency ended the London trading session unchanged against the US Dollar.
Yesterday’s string of Eurozone PMIs were mostly underwhelming, although they’ve had little effect on the Euro. Service sector growth slowed, with the PMI falling to 53.1 from 54, largely due to declines in both Germany and France.
By contrast, retail sales were better than expected on Tuesday. Sales for February increased by 0.2% for the month, a four-month high of 2.4% on an annualised basis. This bodes well for the Eurozone economy, which registered a meagre 0.3% growth in the final quarter of last year.
German industrial production data this morning is unlikely to move the Euro. The ECB minutes and speeches from central bank members Praet, Constancio and, importantly, Draghi on Thursday will likely be the main market movers this week.
The US Dollar had a mixed day on Tuesday, ending 0.1% higher against its major peers amid another sharp decline against the Yen.
This small rally came despite the US trade deficit ballooning in February according to the Commerce Department. The deficit increased to $46.2 billion from $45.9 billion in the month previous, with a rebound in imports exceeding that in exports.
JOLTS job openings, seen as a good indicator of labour market confidence, also fell unexpectedly in March, declining to a three-month low of 5.445 million.
Elsewhere, the closely followed non-manufacturing PMI from ISM painted a slightly more upbeat picture of the US economy, increasing to 54.5 from 53.4.
Tonight’s FOMC minutes will likely be the biggest market mover today at 19:00 UK time.
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