Currency traders largely overlooked a robust UK service sector print yesterday as Brexit fears persisted despite the resilience of the British economy since the vote.
Following on from sturdy manufacturing and construction figures, the services PMI jumped from 55.2 to a 17-month high of 56.2, smashing forecasts of 54.7. Taken together, the PMI trio indicates that private sector growth increased at the fastest pace for 17 months in December, suggesting that the British economy expanded by around 0.5% in the fourth quarter of 2016.
However, economists continue to warn that Sterling’s 15% depreciation in 2016 will drive price pressures higher, constrain consumer spending and hamper economic growth in 2017, while traders continue to treat the Pound with caution.
Despite the outperforming UK service sector PMI reading yesterday morning, Sterling softened a little bit versus the single currency yesterday.
It seems that news of a speech later in the month, in which UK Prime Minister Theresa May will seek to outline her Brexit strategy, weighed on demand for the Pound. It is believed that May will put control of Britain’s borders ahead of access to the continent’s single market. Single market continuity is viewed as a positive by most economists and the uncertainty of a post-Brexit future outside of the single market is one of the primary reasons that Sterling has suffered a 15-cent depreciation since the referendum.
The Pound registered gains of just under a cent versus the US Dollar yesterday as developments in China dragged the ‘Greenback’ lower across the board.
GBP/USD surged to a fortnightly high as Dollar demand was negatively impacted by moves in Hong Kong to increase borrowing costs. Yuan interest rates surged to the highest level in almost a year yesterday, which allowed the currency to rally almost 1% versus the US Dollar. Subsequently, the ‘Greenback’ softened against many of the majors.
However, we could see the world’s premier reserve currency fight back this afternoon if December’s labour data prints positively. Investors are primed for a US non-farm payroll reading of 178,000, which should be enough to maintain the Federal Reserve’s hawkish 2017 outlook.
The Pound recovered from a two-month low, posting gains of around 50 pips versus the Canadian Dollar yesterday ahead of this afternoon’s Canadian labour market report. Analysts are anticipating a -2,500 drop in employment, which could nudge the North American nation’s jobless rate up from 6.8% to 6.9%.
Tightening of borrowing costs in Hong Kong helped to lift the Australian Dollar higher yesterday, however, Sterling recovered during the afternoon to leave GBP/AUD flat on the day. A strong US NFP report will likely apply some downward pressure on the risk-sensitive ‘Aussie’ this afternoon, whereas a subdued labour growth figure could spark demand for the high-beta Antipodean.
As is often the case, the GPB/NZD graph followed a similar trajectory to the GBP/AUD graph yesterday. The New Zealand Dollar initially strengthened versus Sterling, due to bullishness in the Asia-Pacific region relating to the Yuan appreciation, but the Pound fought back by the close of play to leave the pair pretty much flat on the day.
10:00 EUR Euro-Zone Retail Sales (YoY) (NOV) Medium 1.9%
13:30 USD Change in Non-farm Payrolls (DEC) High 178k
13:30 USD Unemployment Rate (DEC) High 4.7%
13:30 CAD Unemployment Rate (DEC) High 6.9%
13:30 CAD Net Change in Employment (DEC) High -2.5k
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