Pound stabilises around multi-decade low, Dollar hits 7 week high

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5 October 2016

thomasdodds

Sterling steadied itself during London afternoon trading on Tuesday, having earlier plunged to its weakest position against the US Dollar in 31 years as concerns surrounding the effects of June’s Brexit vote take hold.

Y
esterday’s construction PMI provided little comfort for the currency, despite the index venturing above the level of 50 that denotes expansion for the first time in four months. The index rose to 52.3, from a fairly dire 49.2, its highest level since March this year, largely in part to a swift recovery in residential construction.

This morning’s services PMI in the UK was slightly less comforting, posting a modest decline in September from a month previous. The index fell to 52.6 from 52.9, although remained comfortably above the multi-decade low levels registered following the Brexit vote in the summer.

Economic data since the referendum continues to suggest that the negative effect on the UK economy may not be as severe as first feared. We think that the UK should comfortably avoid contracting in the third quarter when the initial GDP numbers are released later in the year.

The US Dollar showed broad strength again on Tuesday, rallying after some hawkish comments from Federal Reserve member Jeffrey Lacker.

The Euro subsequently dipped to its lowest level in two weeks, although spiked during afternoon trading after ECB officials claimed that the central bank will probably wind down bond purchases before the conclusion of its quantitative easing programme.

Focus in the currency markets this morning shifts firmly to Friday’s US nonfarm payrolls report. This afternoon’s ADP employment figure, which measures the number of jobs created in the private sector in the US, could give us a decent indication as to the strength of Friday’s report.

Major currencies in detail:

GBP

The Pound fell 0.85% against the US Dollar, hitting a fresh 31 year low, while spending the day below 1.15 versus the Euro for the first time in three years.

Britain’s Prime Minister Theresa May spoke on the topic of the UK economy yesterday, reassuring investors that economic conditions remain strong despite the sharp fall in the Pound following the Brexit vote.

This came hot off the heels of another growth downgrade from the IMF, which now expects the UK economy to grow 1.1% next year, half that predicted before the referendum.

With this morning’s services PMI out of the way, attention now shifts to Friday’s manufacturing and industrial production data.

EUR

The Euro spiked versus the Dollar yesterday afternoon, with the currency ending 0.3% higher following the news about the ECB’s QE programme.

Earlier, producer prices in the Eurozone continued to contract in August. The PPI fell 0.2% in the month and 2.1% on a year previous, suggesting that the ECB would be right to maintain its existing accommodative monetary policy stance.

Senior ECB member Peter Praet also spoke on Tuesday, although added little new information of note. Praet reiterated that interest rates in the Euro-area will remain low for an ‘extended period of time’, until inflation returns to the central bank’s target.

Thursday’s ECB meeting accounts will be the main announcement in the Eurozone this week.

USD

The Dollar continues to go from strength to strength this week, with the Dollar index surging to its highest position since early August.

News out of the US was fairly limited yesterday with the Dollar facing solid headwinds from Monday’s manufacturing PMI. Richmond Fed President Jeffrey Lacker spoke in Charleston yesterday. Lacker claimed that two rate hikes in 2017 would be ‘awfully gradual’, suggesting that he would have voted for an immediate hike in September had he been able to cast a vote.

The ISM’s non-manufacturing PMI this morning is expected to increase to 53 for September following an abysmal result in August that saw the index plunge to a near seven year low. The nonfarm payrolls report on Friday remains the main announcement in the US this week.

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