Sterling plunges after weak manufacturing data, AUD falls after RBA cut
04/May/2016 • Currency Updates•
The Pound had a roller coaster day on Tuesday, falling sharply against both the US Dollar and Euro after first rallying to its strongest position versus the Greenback since early January.
Yesterday’s sharp decline in the UK currency followed an unexpectedly poor manufacturing survey, which underlined how fragile the UK economy had become due to concerns regarding the EU referendum in June.
Britain’s manufacturing sector contracted for the first time in three years (March 2013 was the last time), with firms in the UK blaming weak domestic demand, a decline in new business from abroad and uncertainty surrounding the referendum on EU membership.
The Euro had a similarly unpredictable day, which highlights the need for risk management, even if your business’s exposure to foreign currencies is limited to the major currencies. The Euro appreciated sharply during the morning session, to its strongest position since August last year, before falling away in the afternoon.
The US Dollar was well supported by comments from Federal Reserve member Dennis Lockhart that echoed our views that the Fed could well hike rates twice in 2016.
Meanwhile, the Australian Dollar was one of the worst performing currencies in the world on Monday, plunging by over 2% against the USD after the Reserve Bank of Australia unexpectedly cut its interest rate yesterday morning.
The RBA slashed its benchmark rate by 25 basis points to a record-low 1.75%, its first easing in a year, as it seeks to alleviate pressure from declining inflation. Inflation in Australia plunged in the first quarter to an all-time low of 1.3%.
Another decline in oil prices proved bad news for commodity-dependent currencies across the board. The Canadian Dollar fell from its 10-month high, while the Russian Ruble and South African Rand also plunged in excess of 2%.
Investors await a host of economic indicator data today, all of which could move the market. Eurozone service sector growth and retail sales are expected to remain more or less unchanged, while construction output in the UK is forecast to have slowed last month.
Major currencies in detail:
Sterling retreated from its four-month high against the US Dollar on Tuesday, ending the session 1.1% lower.
Yesterday’s manufacturing PMI was a significant disappointment, sending the Pound tumbling against most of its major peers. The index fell from 50.7 in March to just 49.2, below the level of 50 which represents a fall in overall output.
This marks the first time since March 2013 that activity in the sector had fallen, with a slowdown in the oil and gas industry providing a significant drag on production.
Such weak output does not bode well for the second quarter, after overall GDP growth in Q1 slowed to just 0.4%. On yesterday’s evidence, manufacturing production is falling at around 1% per quarter, which will put heavy pressure on the service sector to sustain Britain’s economy.
The next major data point this week are this Thursday’s leading business sentiment PMI indices.
The Euro fell by 0.4% against the US Dollar, despite earlier rallying to a seven-month high.
Producer prices in the Eurozone remained deep in negative territory in March, continuing to underline the case for more economic stimulus measures from the European Central Bank. Prices received by Eurozone producers unexpectedly rose by 0.3%, although fell sharply on a year previous by 4.2%, matching February’s more than six-year low.
In another sign of underlying weak economic conditions, the European Commission also cut its GDP growth forecast for the Eurozone for this year to just 1.6% from 1.7%.
Service sector growth figures this morning will be the main focus in the Eurozone today.
Comments from Fed member Dennis Lockhart provided good support for the Greenback on Tuesday, which ended 0.75% higher against its major peers.
Lockhart suggested that two rate hikes this year were ‘certainly possible’, although he failed to comment on whether he would vote for a rate increase at the next FOMC meeting in June.
However, he did suggest that market pricing of 20% for a June hike was too low, with the remaining three quarters of the year to show a rebound in growth following the first quarter’s underwhelming GDP data.
Attention this week will be firmly fixed on Friday’s labour report. In the meantime, services sector growth from Markit and ISM’s non-manufacturing PMI this afternoon will be under the spotlight.
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