Pound falls as global concerns weigh on service sector growth
06/Oct/2015 • Currency Updates•
The US Dollar lost ground as markets opened for the week yesterday, although recovered strongly as the day progressed, shrugging off expectations that the Fed might not hike rates in 2015, following last week’s underwhelming labour report. Meanwhile, Sterling was under pressure following a sharp contraction in UK service sector growth.
The main event in the currency markets today will occur after London markets close, with a speech by President of the European Central Bank Mario Draghi at 6pm. Draghi will be talking at an event in Frankfurt, Germany, with any clues on the timing of further QE likely to drive the single currency. Given recent weak inflation print in the Eurozone, we expect an expansion of the programme to occur in the first quarter of 2016 and place continued downward pressure on the Euro.
The Pound declined by 0.2% against the Dollar yesterday following weak service sector data.
According to Markit, growth in the service sector in the UK economy, the main contributor to Britain’s economic output, slowed to its lowest level since April 2013. Worries about the state of the global economy have curbed spending; causing the flash PMI to decrease from 55.6 to 53.3, well below economists’ expectations. This figure points to an economy growing in the region of just 0.3% on a quarterly basis, which would mark its weakest expansion in nearly three years.
The key event this week in the UK, however, remains the interest rate announcement and minutes from the Bank of England on Thursday. An increase in dissenters would put the central bank on course for a rate hike early in 2016, with a lack of votes for higher rates likely to weigh on Sterling in the short term.
A data light day today, with just house price growth from Halifax at 8am worth noting.
An early surge against the Dollar was short-lived yesterday morning, with the Euro ending the session 0.5% lower.
From a data perspective yesterday, retail sales were flat in the Euro-area in August, registering an above forecast 2.3% growth on an annualised basis. Similarly to the UK, service sector growth also decreased more than forecast in the Eurozone economy. The flash PMI from Markit grew at its weakest pace in four months in September to 53.7. However, critically service firms increased prices for the first time in four years, encouraging news for the European Central Bank, especially considering last week’s poor inflation data.
In terms of economic data today, factory orders in Germany may take on some focus in the Eurozone when released at 7am this morning. The second day of a Eurogroup meeting in Brussels may be a maket mover before Draghi speaks this evening.
The Dollar recovered early losses to end higher against its major counterparts on renewed risk appetite in the wake of last week’s jobs report. Solid gains against the safe-haven Yen and Swiss Franc contributed to the US Dollar index climbing by 0.3%.
In terms of economic announcements, US service sector growth also slowed last month. The latest PMI from ISM showed a deceleration in September, decreasing substantially from 59.0 in August to just 56.9, shy of economists’ expectations. A similar index released by Markit also showed a slowdown, with its flash PMI down by half a point to 55.1, its lowest reading since July.
Elsewhere, former Fed Chair Ben Bernanke called last week’s nonfarm payroll numbers “mediocre” and bad news for the Fed’s plans to begin increasing interest rates.
The US balance of trade is the main data point across the pond when released at 1.30pm today. This will be followed by a speech this evening by FOMC member John Williams at an event in San Francisco after UK markets close.
Rest of the world
A host of emerging market currencies continued to gain versus the US Dollar yesterday following last week’s US jobs report. The South African Rand, Brazilian Real and Malaysian Ringgit all reversed some of their recent declines against the Greenback.
Meanwhile, the Nigerian central bank claimed that the Naira was “appropriately priced”, and as such suggested there would be no exchange rate adjustments to NGN for now.