Pound Sterling NEWS: GBP Outlook Boost From Service Sector and Weak USD Complex
- Written by: Gary Howes
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The pound sterling (GBP) has traded on the front-foot against most major currencies over the course of the past 24 hours; strong gains against the US dollar are of particular interest.
On Wednesday we are witnessing consolidation in the GBP exchange rate complex following on from the strong gains seen in the wake of the release of the Services PMI from Markit, the figure read at 58.7, a beat on expectations for 57.6.
The latest sterling rates are as follows:
British Pound to Euro exchange rate: 1.1966
British Pound to US dollar: 1.2566
British Pound to Australian dollar: 1.9433
British Pound to Canadian dollar rate: 1.7697
British Pound to New Zealand dollar rate: 2.1566
British Pound to South African Rand rate: 22.8755
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The biggest moves on Wednesday are being seen against the New Zealand dollar which was hit by overnight data that indicated the employment situation may not be as rosy as many had been expecting. The unemployment rate was expected to fall to 5.8% but it read at 6%.
Sterling's main event this week: Markit Service PMI
For the GBP complex, the final installment of the Markit PMI series has proven supportive
What we have learnt from the already released Construction and Manufacturing figures is that the UK economy remains in healthy growth territory and this message will likely be reaffirmed by today's Service sector data.
The number released was 58.7, markets were looking for is 57.6 and this will certainly provide a solid footing for further potential gains from here.
Looking ahead to the ECB and BoE decisions
The outlook also presents us with central bank decision making on Thursday; the ECB decision will be important for direction in the pound to euro exchange rate.
Ipek Ozkardeskaya at Swissquote Research tells us:
"Both central banks are expected to keep the policy rates unchanged at the current historical low levels. The ECB President Draghi’s monthly press conference will be the main focus point.
"We believe that the latest improvement in Euro-zone CPI estimates will be an excellent reason to not act, yet we will be chasing more details on a potential QE to counter the EUR-strength.
"This raises a downside risk in EUR-complex, which is relatively cheap to hedge on the option markets currently, given that the 1-month implied vol stands at the seven year lows (appr. 5-5.5%)."
Why is the US dollar lower?
Tuesday sees the sterling to dollar exchange rate sharply higher and we would expect a test of 1.7 is now likely.
The reason for the strength in this headline pair lies largely with US dollar weakness.
There is little reason to back the USD at present, with a post-NFP rally in the currency complex fizzling out on Friday.
Why did the USD fail to find support from the great NFP data? Kathy Lien at BK Asset Management says there are three reasons:
#1 - There was underlying weakness in the data with the improvement in the unemployment rate driven primarily by the drop in labor force participation.
#2 - The NFP report won't change the Fed's stance on monetary policy. When Yellen speaks next week, she will remind us that tapering does not equal tightening
#3 - The slide in U.S. yields after a strong jump in payrolls makes the dollar a more attractive funding currency.
If the above factors continue to weigh on the USD then expect a test of 1.7 to occur.
