Sterling rallies to one-week high, upcoming major events make it difficult for businesses to predict market direction
03/Mar/2016 • Currency Updates•
Recent high levels of market volatility highlight the importance for companies to secure their budget rate so they can forecast financials accurately. This trend has been further fuelled by the global economic slowdown, weak economic data and the impending yet unquantifiable threat of the EU referendum.
On Wednesday, the Pound strengthened across the board, with a lack of any fresh clues on whether Britain is likely to leave the EU in the summer causing investors to trim back large bets against the UK currency.
The absence of any bad news on the Brexit front was more than enough to wipe out earlier losses suffered after output in the UK construction industry plunged to its lowest level in ten months.
Encouraging private sector jobs figures in the US caused the US Dollar to briefly touch its highest level against its major peers in a month, ahead of this Friday’s nonfarm payroll release.
By contrast, the Euro continued its march downwards, depreciating to its weakest position against the US Dollar since the beginning of February after producer price growth in the Euro-area remained deep in negative territory in January. Such weak inflationary pressure in the Eurozone provides further incentives for the European Central Bank to ramp up its easing measures at its monetary policy meeting next week. We expect this to weigh heavily on the Euro in the coming months.
Earlier in the trading session, the Chinese Yuan shrugged off the decision by rating agency Moody’s to cut China’s outlook for sovereign debt to negative amid rising government debt and falling reserves.
With no major economic releases today, the major currencies will mostly be driven by second-tier announcements. Eurozone retail sales and US service sector growth will draw most attention.
Major currencies in detail:
Sterling rallied by 0.5% versus the US Dollar yesterday despite UK economic data continuing to disappoint.
Construction growth slumped to its weakest level in ten months in February. The PMI from Markit fell to 54.2 from 55, well below expectations. Housebuilding, in particular, performed poorly, expanding at its slowest pace since June 2013 when the economic recovery in Britain had begun taking hold.
Bank of England rate setter Jon Cunliffe also spoke in London yesterday morning. Cunliffe reiterated that interest rates would increase gradually over time, although would not go back to the lofty levels seen before the financial crisis.
Service sector growth from Markit this morning is the only economic announcement in an otherwise quiet day.
Weak economic data and anticipation of additional ECB stimulus continues to provide a drag on the Euro, which fell by 0.15% against the US Dollar on Wednesday.
A lack of inflationary pressures remains a major issue in the Eurozone. Producer prices were again deep in negative in January, falling by 1% on a monthly basis, which is its largest decline in 12 months, and by 2.9% annualised.
This, coupled with the decline in consumer price growth last month, suggests that Eurozone deflation could persist for longer than originally expected.
The ECB is now all but certain to ramp up its monetary stimulus when it meets next Thursday. We continue to expect a cut in the deposit rate and an expansion in quantitative easing measures, which should weigh heavily on the Euro in the coming months.
Service sector growth and retail sales this morning could cause moderate movement in the Euro if we see any significant surprises.
The US Dollar firmed against its major peers on Wednesday, rising by 0.2% after the release of strong economic data.
Labour market conditions continue to show solid signs of improvement. The measure of private sector employment from ADP, seen as a good indicator of the more meaningful nonfarm payroll number, rose more than expected last month. Job creation increased to 214,000 from a revised 193,000, with the average gain in the last three months the most in a year.
Recent impressive economic data in the US, including stronger-than-expected construction, manufacturing and now labour figures, has revived expectations that the Federal Reserve will hike interest rates more than once in 2016.
All eyes in the US will now turn to Friday’s labour report, including the crucial nonfarm payrolls figure, which could provide a clue as to the timing of the next interest rate hike by the Fed.
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