Weak construction data hurts Sterling, investors eye US labour report
05/May/2016 • Currency Updates•
The Pound weakened for the second straight session on Wednesday, with another underwhelming business sentiment PMI from Markit ramping up concerns over an economic slowdown in the UK. Output in the construction sector grew at its slowest rate in nearly three years in April.
On Tuesday a fairly dismal manufacturing survey had already caused the UK currency to suffer its largest one-day decline in six weeks.
The US Dollar was mostly range-bound yesterday, finishing the day marginally higher despite some underwhelming labour data, which doesn’t bode particularly well for this Friday’s crucial nonfarm payroll figure.
The number of jobs added in the private sector of the US economy slowed in April from 200,000 to just 156,000, its weakest growth since February 2014.
This Friday’s labour report is becoming a major event risk for the US Dollar and is providing an opportunity for businesses to hedge their currency exposure. We think that any figure around the 200,000 level anticipated should provide support for the Dollar and put the Federal Reserve on course for their second interest rate hike at the central bank’s next meeting in June. For those who have Dollar liabilities and wish to cover their requirements locking in exchange rates should be completed before the announcements on Friday at 13:30 UK time.
Similarly, the Euro ended the session little changed despite disappointing services and retail sales releases. The single currency therefore remains around its strongest position against the Greenback since October following last week’s fairly noncommittal FOMC meeting and encouraging growth figures in the Eurozone in the first quarter.
With economic releases and announcements on the light side today, FX markets will instead be looking to Friday’s labour report as the next major event that could influence the major currencies.
Major currencies in detail:
Another poor UK PMI sent Sterling 0.4% lower against the US Dollar on Wednesday.
Construction output in Britain fell more than expected yesterday. The index declined sharply to just 52 from 54.2 in March, with uncertainty surrounding the upcoming EU referendum causing customers to delay major spending decisions until after the vote on 23 June.
Employment in the construction industry remains around its weakest in nearly three years in another sign that Britain’s labour market could be losing speed. This will not be good news for the Bank of England, which remains a long way off its first post-financial crisis interest rate hike.
Investors are focusing on this morning’s services PMI from Markit, which is also expected to show a moderate slowdown. This takes on added importance due to the UK economy’s reliance on the service sector, as opposed to the primary and secondary sectors that have been in marginal decline for decades.
The single currency was unchanged against the US Dollar yesterday despite mostly poor economic data in the Euro-area.
Service sector growth slowed in March, with the latest PMI from Markit declining modestly to 53.1 from 53.2. Impressive growth in Spain and Italy was offset by another dismal performance in France’s service sector, which barely grew in April.
Retail sales in the Eurozone also fell more than expected. Sales declined 0.5% in the month to March, although provided little drag on overall GDP, which grew by a much improved 0.6% in the first quarter, outpacing both the UK and US economies.
With much of the Eurozone observing a national holiday for Ascension Day today, announcements will be very limited. Euro volatility will likely be driven by events elsewhere.
The US Dollar index rose by 0.3% yesterday, rallying to its strongest position since Friday.
The trade deficit in the US narrowed more than expected in March, with a sharp decline in both imports and exports underscoring the slow growth in both the US and abroad. The trade gap decreased by 13.9% in March to $40.4 billion, although failed to provide a meaningful boost to first-quarter GDP growth, which measured a meagre 0.5%.
Elsewhere, service sector growth painted a more upbeat picture of the US economy. Last month’s services PMI increased to a three-month high of 52.8 from 52.1, while ISM’s nonmanufacturing PMI rose to 55.7 from 54.5.
Initial jobless claims and a speech from Fed member James Bullard (one of the four hawks within the FOMC) this afternoon could cause moderate volatility in the US Dollar today. Most attention, however, will be firmly on Friday’s labour report.
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