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Daily Update: Negative UK Services PMI Pushes Sterling (GBP) Lower

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GBP: Pound Sterling Plunges after Negative UK Services PMI

The Pound continued to trade lower across the board today after the release of the negative UK Markit services PMI. Whilst June’s composite PMI did come in as expected at 53.9, it was still lower than the previous month’s 54.5 and the services PMI alone didn’t meet expectations; printing at 53.4. This was less than the expected figure of 53.5 and down from the previous 53.8.

The UK services sector makes up 70% of British growth, so it coming in lower than anticipated has provoked even more traders to sell Sterling – especially as the prospect of a Bank of England (BoE) rate hike hinges on the UK economy being strong enough to withstand it.

BoE’s Michael Saunders touched on this fact:

‘I think households should prepare for interest rates to go higher at some point. But if rates do go up, it will be in the context of the economy doing OK and unemployment being low and probably falling.’

‘…the context of the economy doing OK,’ being the operative statement here, as today’s negative PMI data has become somewhat of a trend after yesterday’s, which revealed that UK construction activity softened in June.

EUR: GBP/EUR Flat as Rate Hike Bets Dampen

The Euro failed to capitalise on the weakness of the Pound, with the pairing trading flatly after yesterday’s dovish announcement from ECB chief economist Peter Praet.

In reference to the central bank using stimulus to support the domestic economy, Praet stated:

‘But our mission is not yet accomplished. We need patience and persistence. We need to be patient, because inflation convergence needs more time to show through convincingly in the data. The Euro area’s economic environment is improving, and the fat negative tail to inflation expectations, which was so visible at the start of our asset purchase programme, has virtually disappeared.’

This statement contradicts last week’s slightly more hawkish comments from ECB President Mario Draghi and lends further credence to the theory that ECB policy will be left alone until 2018.

The big data for the Eurozone today was the release of the bloc’s services PMIs, which, despite a slight drop in growth from the previous month, were still quite positive. The final headline PMI printed at 56.3, higher than expectations of 55.7 but less than May’s 56.8. . The Euro, however, was pretty unmoved by the results.

USD: US Dollar Bearish before Federal Reserve Minutes

Sterling has continued to inch lower against the US Dollar after today’s underwhelming UK services data demonstrated a negative trend.

Overall the US Dollar is currently somewhat bearish as markets await today’s Fed meeting minutes, as these will give insight into exactly how committed the Fed is to raising interest rates again this year. Markets are currently split on the subject, so the US Dollar is liable to move in either direction. Any hawkish sentiment will bolster the appeal of the US Dollar, whilst a more cautious attitude (possibly resulting from the recent softening of US data) could put the ‘Greenback’ under pressure.

CAD: GBP/CAD Hits 2.5-Month Low as BoC Rate Hike Prospects Increase

Sterling struggled against the Canadian Dollar yesterday, dropping over a cent to reach a fresh 2.5 month low. The continued drop resulted from traders buying into the ‘Loonie’ after Stephen Poloz, Governor of the Bank of Canada, made some hawkish hints.

Poloz asserted that monetary policy should anticipate where the economy will be in 18-24 months, stating:

‘As our senior deputy governor said a week ago, when you are driving towards a red stoplight, you ease up on the accelerator well before you get there instead of waiting for the last second to stop.’

The expectation for monetary tightening next week increased above 50% after his comments, driven also by remarks that Canadian inflation will be on an upward trend for the first half of next year.

Crude Oil prices slipped this morning after high OPEC export levels for June were revealed, ending the longest bull-run for the commodity in some five years. The Canadian Dollar remained unperturbed, however, as traders flocked to the ‘Loonie’ simply because of the perceived likelihood of an imminent rate hike.

AUD: Pound to Australian Dollar Exchange Rate Soars Following Dovish RBA Comments

Yesterday’s dovish announcement from the Reserve Bank of Australia (RBA) dampened all hope for a near-term rate hike.

As a result, Sterling saw significant gains against the ‘Aussie’ Dollar, and continued to do so this morning.

No big data for the ‘Aussie’ Dollar today, but markets will be awaiting tomorrow’s Australian trade balance, which is currently predicted to have almost doubled from previous figures.

NZD: New Zealand Dollar Suffers after Dairy Auction Prices Fall

The fortnightly New Zealand dairy auction prices were announced yesterday, with the winning price coming in at $3303, $131 less than the previous $3434.

The drop caused the dairy-correlated ‘Kiwi’ to pare some gains, but with Sterling suffering from the recent spate of negative PMI data the pair traded within a relatively narrow range.