Following on from Tuesday’s strong manufacturing PMI result, Markit Economics reported yesterday that UK construction activity outperformed economists’ expectations in December. The construction PMI jumped from 52.8 to 54.2 thanks to a ‘robust and accelerated’ expansion in the sector, however, demand for Sterling remained capped by fears that higher input costs would create problems for firms in 2017. If this morning’s service sector PMI beats market forecasts then we could see a more pronounced reaction from traders because Britain’s dominant service industries account for over 70% of UK economic output.
The Pound to Euro exchange rate fluctuated throughout yesterday’s session but the single currency struggled to hold onto gains following a decent inflation print.
Eurozone consumer prices were reported to have jumped from 0.6% to a three-year high of 1.1% in December, with energy, food, alcohol and tobacco prices all rising. The upbeat CPI print will have soothed policymakers at the European Central Bank, who have cut interest rates to record levels and thrown billions of Euros at the Eurozone economy to try and spur price pressures over the past few years. The ECB aims for inflation of 2.0% and if prices continue rising towards that level the single currency could begin to strengthen as talk of tapering QE increases.
A separate ecostat from the currency bloc showed that private sector output jumped from 53.9 to a five-year high of 54.4 in December.
‘Cable’ rallied almost a cent during the London session yesterday, despite a slightly worrying development related to Brexit.
Britain’s top EU diplomat, Ivan Rogers, announced his resignation yesterday, citing the government’s lack of Brexit negotiating objectives, ‘ill-founded arguments and muddled thinking’ as reasons for quitting. The criticism from one of Britain’s foremost experts on Europe will not sit well with investors, who are already concerned with the lack of negotiating transparency.
During the evening the minutes from the Federal Reserve’s December meeting – when the US central bank raised rates 25 basis points and predicted three further hikes in 2017 – were released. The text showed that some policymakers were prepared to raise rates faster than markets expected prior to the meeting, however, the hawkish nature of the minutes report did not translate into instant gains for the ‘Greenback’, which has already benefitted from rising rate hike expectations over the past month.
Higher prices in Canada’s lucrative oil sector continued driving the Canadian Dollar higher across the board yesterday. Sterling tumbled to a new two-month low versus the commodity-sensitive ‘Loonie’ as crude prices accelerated due to reduced output from OPEC and non-OPEC nations.
On a day when UK construction output printed strongly at a nine-month high and the Bank of England announced that credit growth reached an 11-year high at the end of 2016 the Pound failed to publish any gains versus the Australian Dollar.
The credit growth data showed that consumers borrowed 10% more in November 2016 than they did in November 2015, in what some analysts said was likely to be the build-up to one last spending spree before the real impact of Brexit filters through to the British economy and constrains consumer purchasing power. Forecasters expect the Sterling depreciation of 2016 to drive consumer prices higher in 2017. Wage growth is not anticipated to keep up with inflation and consequently real wages are tipped to suffer this year.
Decent construction figures buoyed the Pound yesterday, while the shock resignation of Britain’s top EU envoy weighed on demand. This left the Pound to New Zealand Dollar exchange rate to trade flat on the day. We could, however, see GBP/NZD surge during today’s session if we are treated to a positive UK service sector PMI.
09:30 GBP Markit/CIPS UK Services PMI (DEC) Medium 54.7
15:00 USD ISM Non-Manufacutring Composite (DEC) High 56.7
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