US service sector growth falls to slowest in six months

Enrique Díaz-Álvarez07/Jan/2015Currency Updates

GBP

The Pound dropped for a second consecutive day this week against the US Dollar on the back of some more weak growth data. Cable finished the day 0.35% down, and has now fallen by over 2% since Christmas.

The UK services sector lost momentum towards the end of last year. In a Markit report, growth in UK services hit a nineteen month low, with the flash index registering a significantly below expected reading of 55.8, down on November’s 58.6. Such a sharp decline may fuel concerns about the fragility of the UK economy according to Markit’s Chief Economist Chris Williamson, however, despite the slowdown, the sector remains comfortably above the 50 mark which represents expansion. Bank of England data in its quarterly Credit Conditions Survey made for bleak reading, showing a significant jump in consumers’ willingness to borrow. Demand for credit card lending and an overall increase in the amount of unsecured credit made available may pose a risk to the economy when interest rates eventually rise in the UK; we expect this to occur towards the backend of 2015.

Today bodes to be a quiet day in the UK as far as data is concerned, with most market volatility expected to be due to releases in Europe and the US.

EUR

The single currency stabilised on the US Dollar as the day progressed on Tuesday. The Euro ended its run of declines to finish the day where it began against the greenback, despite some poor service sector growth data.

As the Eurozone prepares for quantitative easing measures, data from Markit Economics on Tuesday showed that services sector growth stagnated in the final quarter of 2014. While expanding in September, the flash PMI measure for the Eurozone came in below forecasts at 51.6. Despite this, the composite index managed to rise slightly in December, up 0.3 index points to 51.4. While growth in the German composite manufacturing and services sector unexpectedly rose, the rate of expansion remains lacklustre compared with this time last year.

Data releases on Wednesday look set to bring significant market volatility in the Eurozone, with a string of first tier announcements. Market focus will be on unemployment figures in Germany at 9am, followed by inflation data for the Eurozone at 10am, both GMT.

USD

The greenback was mostly unchanged, with the US Dollar index declining marginally by 0.05%.

Much like its major peers, the US services sector growth also slowed last month. Activity in the sector grew at the slowest rate in six months as the Institute of Supply Management’s index declined to 56.2 in December, down from the previous reading of 59.3. This was significantly lower than forecast, as analysts had expected the reading to only fall to 58.0. Elsewhere, factory orders fell for a fourth consecutive month, declining by as much as 0.7% in November. New orders for durable manufactured goods were down 0.9% to $241.6 billion, while transportation equipment fell again by 1.3% to $75.5 billion.

Major market volatility is expected this evening in US trading with the release of the Federal Reserve minutes at 7pm London time.

Rest of the world

Oil prices continued its recent trend and fell further on Tuesday, with US oil now below $49 a barrel. Oil dependant Norway saw its Krone decline by 1.2%, voicing speculation that the country’s central bank may need to cut interest rates again. The Vietnamese central bank weakened its reference rate by 1% in a bid to boost the nation’s exports, while the Russian Ruble fell once again by 3.7%.

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Written by Enrique Díaz-Álvarez

Chief Risk Officer at Ebury. Committed to mitigating FX risk through tailored strategies, detailed market insight, and FXFC forecasting for Bloomberg.